> you are dismissing out of hand the possibility of buying the warrants *on margin*.
The discussion started (and has continued as far as I'm concerned) when it was noted by WTDEC that using LGNDW to control 100 shares of LGND has a financing cost of about 14%. This is high when the same 100 shares can be financed by use of margin at a much lower (and deductible) rate.
Anyway, I just commented (in the message that you responded to) that even if 2x as many warrants were purchased on margin, the stock is still ahead by $125. The next time I update the model I will thow in a 3rd column that uses margin on the warrants to control 2x as many shares (even though it is not comparable for a finacing model).
> That is unfortunate, because many of us have chosen to go precisely that route.
> Whether or not you think it is a wise move from a risk management point of view
I never was discussing risk management, I was always discussing financing. If you want to throw risk-management into the mix, then you must also consider using options to contol LGND, not just warrants. You must also quantify the risk of LGNDW falling below marginable limits, the risk due to liquidity (which, btw is unusual if warrants are such a good deal), and the wide spread (due to it being thinly traded.
As far as I can tell, only myself and WTDEC have acknowledged the exess financing cost of using warrants.
> Which decision an investor chooses to make (long or short, with or without margin,
> warrant or stock) is a matter of individual preference and risk aversion.
Agreed. But since few Long-Term investors seem to realize that there is a substaintial finacing cost with warrants the discussion is needed.
> Your analysis of the implied interest rate of holding the warrants, while arithmetically
> correct, does not use the appropriate analysis model, in my view.
Then I'll ask you to please provide the correct financing model for a long term investor who wants to control 1000 shares of Ligand.
--Tony |
