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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Adam Nash who wrote (47605)	1/30/2001 11:13:11 PM
From: Wyätt Gwyön	Respond to of 77400

Good points. The problem is that Black-Scholes assumes a zero-sum standard European contract I don't think calculating the option value would be that big a deal--they can calculate American contracts with Black-Scholes, after all. Just don't ask me to do it--I'm still learning Quicken <g>. How 'bout one of those geniuses from LTCM; they should have some free time these days... However, the fact the Cisco does not "buy" equity to fulfill the contract, but just issues it, means that really Cisco is not experiencing an expense in the traditional sense of the word I understand what you are saying; I'll try to give a Devil's Advocate interpretation. It does not matter if Cisco must prospectively issue the share out of thin air (i.e., treasury); in such an event, there is a real dilution cost. And if such event does not occur, there is no real cost. But the prospective opportunity for exercise at the time of issuance--that has value at the time of issuance, regardless of the contract's ultimate fate. I think the situation sufficiently parallels the seller of a covered call. This seller must of course pay for the equity in advance (unlike Cisco), but I don't think it matters how the equity was acquried. In both cases, the call writer (Cisco or a covered call seller) is issuing an opportunity that has a calculable value. Cisco, like the call seller, is capping the value of existing shareholder equity at the time of issuance. The covered call seller is compensated in cash; Cisco in "work in kind". Well, that is just one interpretation. I'm not going to frame it in gold, but I think it could be the basis of a decent argument. This is all prolly moot in the real world--like as not none of this will come to pass. FASB couldn't even get pooling killed, after all. The only thing that really remains is all those extra shares out there. AAt least they could report share counts consistently from one year to the next so that people would know how much dilution is going on.