To: tonyt who wrote (14334 ) 2/6/1998 10:36:00 AM From: Flagrante Delictu Respond to
tonyt, If you get a chance, please read Stewart H. Whitman's informative post #14334. It might help clarify the issue for you. A Nobel prize in Economics was awarded to Fisher Black for supplying the Black-Scholes model enabling the valuation analysis of underlying instruments vis-a-vis their derivatives. When that model was used by Stewart H. Whitman in order to find out what the model indicated LGNDW's fair value, on a risk neutral basis, was compared to LGND, when LGND was trading at $11.31 the other day, the answer given was $6.00. You , at the same time were saying that LGNDW was worth only $5.25. To justify your faulty conclusion, you pointed out that ownership of the warrants instead of the stock, when the warrants were $6.00 & the stock was $11.31, came at a cost of 14% in interest. However, that did not take into account the risk that the stock could decline $5.31 more than the warrants. The Black-Scholes model, on the other hand is risk neutral between these instruments, and assumed the risk-free rate of return of 6% based upon where the 2 year Treasuries were trading. Nor did you take into account that the trader could margin the warrants. You assumed only margining the stock. Since some traders might not have available the additional funds, you made no allowance for their preference to be positioned in the stock via the warrants. For these reasons, I pointed out that your analysis was flawed. In the face of the Nobel prize winning analysis to the contrary, you persist in espousing this drivel, which you think enables you to escape answering the many questions which have arisen from the disturbing posts you have foisted upon us. Bernie.
