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Strategies & Market Trends : Roger's 1997 Short Picks -- Ignore unavailable to you. Want to Upgrade?

To: Steve Robinett who wrote (6979)	11/14/1997 1:47:00 AM
From: Bearded One	Read Replies (3) \| Respond to of 9285

My numbers were a bit off, so I took another look at it. The main point is this: The lenders give a low interest rate in return for the right to convert. How much money are they paying for this right? So compare the interest rate they could have gotten with the interest rate they are getting to find how much they're paying. That gives you the price of their "option". 350 million dollars at 4% interest. Assuming they could have gotten 7% interest, that's 3% of 350 million dollars which is 10.5 million dollars for 5 years, or 52.5 million dollars it cost them to give AOL this low interest. For this 52.5 million dollars, they have the right to purchase 350,000,000/104.38 = 3.3 million shares or so at 104.38 in the next 5 years. 52.5/3.3 = 16.5 or so. That's an implied volatility of 28%, using the American option model, which is appropriate given they can convert whenever they want. Since that volatility is less than the current or historical volatility of AOL, it implies that the options where very cheap. To correct the volatility, you have to lower the price of AOL. For example, a volatility of 40% gives an implied current price of AOL of 62. If you say 6.5% interest rather than 7% interest, the 52.5 million dollars goes down to 44 million dollars, for 3.3 million shares gives you 11 dollars per share, my original estimation. For a volatility of 40%, you need a current price of AOL of 53.