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Technology Stocks : Ascend Communications (ASND)
ASND 199.01-1.6%3:10 PM EST
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To: Sanzen who wrote (51482)8/3/1998 6:04:00 PM
From: Raj  Read Replies (1) of 61433
 
Here's the deal:
Let x = price of ASND
Let y = price of SRA
Let r = interest rate for 3 months = anual_rate/4
Assume deal is 1 SRA = 0.75 ASND => y = 0.75x

Then for a zero risk no arbitrage:
0.75x = 1y + ry

x/y = (1+r)/.75

Lets say the margin rate is 7%. Therefore r = 0.07/4 = 0.0175
x/y = (1+0.0175)/0.75 = 1.36

1.e 1 ASND = 1.36 SRA
if ASND trades at 46.8125 then SRA (risk-free) = 46.8125/1.36 = 34.42
Premium at close = 34.42 - 33.75 = 0.67
Thus for each margin rate you can compute the risk premium
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