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Strategies & Market Trends : Expirationless Options (XPOs)- The Next Big Thing -- Ignore unavailable to you. Want to Upgrade?

To: Tech Master who wrote (9)	7/6/2005 1:24:17 PM
From: Tech Master	Read Replies (1) \| Respond to of 60

With all due respect to Dr. Josh Lerner of Harvard as to whether XPOs are patentable in the HedgeWorld article posted prior to this message, it is important to note that Dr. Lerner is neither an attorney nor educated in finance. Two of the requirements for patentability are that the invention be "novel" and "useful". While it is true that Paul Samuelson mentioned "perpetual American warrants" in his 1965 paper, the pricing addendum creates prices greater than the underlying asset which is clearly impossible in any efficient market, rendering them not useful. It is also true that Samuelson and Merton's 1969 paper, as well as Black-Scholes (1973) and Merton (1973) also mentioned "perpetual American warrants", but also stated that they "must" be equal to the underlying asset in price. Again, not only impossible, but not "useful". Therefore, his argument fails on several grounds: 1. The papers cited "warrants", not "options". Only a company which issues the underlying stock can issue a warrant. Anyone can sell an option. (A warrant is a particular type of option, not the reverse). 2. The papers mentions required that the "perpetual American warrant" be priced at or above the underlying stock price at all strike prices - not only impossible under Arbitrage Pricing Theory, but also "not useful" in that no one would pay more for a derivative than they would for the actual asset. 3. None of these papers possessed the required "inventive step" of "interaction with the real world" - therefore they cannot be prior art.

To: Tech Master who wrote (9)	7/11/2005 5:05:21 PM
From: Tech Master	Respond to of 60

Not even Samuelson himself believed that the 1965 paper was correct. See below. Samuelson, P., Merton, R.C.; "A Complete Model of Warrant Pricing that Maximizes Utility", Industrial Management Review, MIT, 1969, page 31 "Admittedly, out new theory has arrived at the same paradoxical result as the special case of the 1965 theory [Samuelson paper referenced in the NBER paper by Lerner], namely that a perpetual warrant should sell for as much as the common stock itself. Such a result would seem empirically bizarre. In real life, perpetual warrants generally do sell for less, and since the common stock is equivalent to a perpetual right to itself at zero exercise price, one would have thought it would dominate a perpetual warrant exercisible (sic) at $1. Indeed, one of the purposes of the general 1965 theory was to construct a model that would keep perpetual warrants down to a price below the common [stock]. What is there to do about the paradox? First, one can recognize that the common stock maybe paying dividends now or can be expected to pay dividends at some time in the future...Finally, we can dispel the paradox by accepting it as prosaic...Hence, why should not the perpetual warrant sell for essentially the same price as the common? And, if people believe this will be the case, it will be a self-fulfilling belief." Now, the difference between a $1 strike and a $0 strike (the stock itself) may be minimal if the stock is selling for $25, but you cannot reach the same conclusion if you are talking about the difference between a $100 strike and a $0 strike, especially if the stock is selling for $25.