33 lines
2.2 KiB
Plaintext
33 lines
2.2 KiB
Plaintext
430 l'art IV: Additional Considerations
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Conversion profit = Striking price + Call price - Stock price - Put price +
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Dividends to be received - Carrying cost of position
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Reversal profit = Stock + Put - Strike - Call + Carrying cost - Dividends
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Note that during any one trading day, the only items in the formulae that can change
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are the prices of the securities involved. The other items, dividends and carrying cost,
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are fixed for the day. Thus, one could have a small computer program prepared that
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listed the fixed charges on a particular stock for all the strikes on that stock.
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Example: It is assumed that XYZ stock is going to pay a ½-point dividend during the
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life of the position, and that the position will have to be held for three months at a
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carrying cost of 6% per year. If the arbitrageur were interested in a conversion with
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a striking price of 50, his fixed cost would be:
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Conversion fixed cost = Carrying rate x Time held x Striking price -
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Dividend to be received
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= .06 X 3/12 X 50 - ½
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= .75- ½ = .25, or¼ point
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The arbitrageur would know that if the profit potential, computed in the simplistic
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manner using only the prices of the securities involved, was greater than ¼ point, he
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could establish the conversion for an eventual profit, including all costs. Of course,
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the carrying costs would be different if the striking price were 40 or 60, so a com
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puter printout of all the possible striking prices on each stock would be useful in
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order for the trader to be able to refer quickly to a table of his fixed costs each day.
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MORE ON CARRYING COSTS
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The computation of carrying costs can be made more involved than the simple
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method used above. Simplistically, the carrying cost is computed by multiplying the
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debit of the position by the interest rate charged and the time that the position will
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be held. That is, it could be formulated as:
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Carrying cost = Strike x r x t
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where r is the interest rate and t is the time that the position will be held. Relating
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this formula for the carrying cost to the conversion profit formula given above, one
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would get:
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Conversion profit = Call - Stock - Put + Dividend + Strike - Carrying cost
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= Call - Stock - Put + Dividend + Strike ( 1 - rt) |