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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 75.19-0.1%3:59 PM EST
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To: RetiredNow who wrote (56025)10/21/2001 10:30:27 AM
From: Stock Farmer  Read Replies (1) of 77400
 
mindmeld - you raise some points worth pondering. But it might just be something different.

Looks like ML is offering the public to take counter-party position to a collar. Not necessarily on their own holding. Perhaps on someone's stock options, or on behalf of the principles in a company that Cisco is gobbling up.

The cash payment of 8% versus risk free rate on the up-front fee represents a net-present-value of about $1 per share on a price of $16.72

So if Cisco dips by $1.00 (NPV), then ML's client wins outright. If Cisco fails to gain $1.00 (NPV) then ML's client also loses outright. But if Cisco gains more than $1.00 (NPV) then ML wins by the difference (reduced perhaps by any incremental payments related to its call option).

What is unusual is that despite their "think bullish" attitude, ML is not absorbing the downside risk themselves for a larger stake of the upside. In essence they are hedging against downside to Cisco. Which should tell you something.

You might also note that $0.33 per quarter plus a share of Cisco after two years is about 10 times higher rights to money than outright ownership of a Cisco share. Even if you count pro-forma money. Which should tell you the same thing.

John.
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