Richard,
<<Option theory is a tricky thing...>>
Agreed.
<<...and it really depends a little bit on whose model you're using...although Black-Scholes seems like the one with the greatest currency in recent times.>>
I don't know of many professional analysts or investors who use the straight Black-Scholes model as their primary tool for pricing warrants, although a number use modified versions as a check against their central valuation method. In the case of Microvision the straight B-S is inappropriate due to the potential dilution on exercise of the warrants and Representative Warrants, so an extended B-S model would need to be used.
<<Now just to set one or two things straight...1) MVIS warrants are exercisable at $12 for five years.>>
I hate to appear picky, but they're exercisable for just over 4.5 years. Every day that goes by eats into that time premium and it's surprising what a difference six months makes.
<<Markets have ways of making sure things don't ever get too far out of parity>>
In time, yes, but not always in frothy bull markets such as we're experiencing now. Even professional arbitrageurs have to be careful not to get stampeded by the herd.
<<What options pricing model are you using?>>
My own, which uses a number of different valuation methods in a weighted form. With Microvision, however, there is the added complication of the early redemption clause which rather throws conventional valuation out of the window.
To be fair on Microvision, the way the US markets value warrants seems very strange to European investors, and I think now that more international investors have access to financial information from the States, we are going to see a gradual reassessment of US warrant prices (downwards). In addition, the early redemption clauses may become a thing of the past.
If you don't accept this view, let me quote from Andrew McHattie's highly respected "The Investor's Guide to Warrants" (FT Pitman Publishing) -- the 'bible' of warrant investing in the UK -- where he discusses early redemption of US warrants:
"This practice of redeeming the warrants early if the stock performs well effectively puts a cap on the gains available to warrant-holders, and is an insidious clause as far as investors are concerned. One of the great attractions of warrants is that the downside risk is limited to 100 per cent, whilst the potential profits are unlimited. This clause tilts the balance firmly in favour of the issuing companies, for whom it ensures that the warrants are not highly dilutive. Investors should watch out for redemption clauses and consider their risk/reward profile carefully."
Obviously you will disagree with Mr. McHattie's remarks, and I'm sure everyone on this thread will be pleased to read a public rebuffal from a CEO whose company's warrant terms contain such a clause.
Regards,
Andrew |
