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Technology Stocks : MRV Communications (MRVC) opinions? -- Ignore unavailable to you. Want to Upgrade?

To: ED PLOPA who wrote (9710)	7/30/1998 3:19:00 AM
From: Saul Feinberg Jr.	Read Replies (1) \| Respond to of 42804

Ed, I think it works like this. If you bought the bonds (which are selling at a discount because of the reason Seth pointed out), say it is trading at a 20 percent discount to face value. While face value allows you to convert at 27 dollars, or 37 shares (1000/27), at 20 percent discount your 800 dollars can convert to 37 shares, which is equivalent to saying your 1000 dollars can convert to 46.25 shares(37000/800). Effectively, your 1000 dollars converted to MRV shares at a cost basis of 21.62 per share (1000/46.25). So, if you short above 21.62, you will be profitable assuming you hold until conversion. This is a more simple explanation. The real calculations will involve Black Sholes, because technically when the stock price is way below the conversion price, the bond effectively is a bond and has zero option value. But as it draws closer to the conversion price, it has an option component to it. It's really complicated and I have to dig up my old stuff from work to come out with convoluted calculations that are not really worth the time. Then you have to factor the current interest rates on Bonds, etcetera. I dont like to use covariance, calculus with my stock investments. Warren Buffett, Templeton, Phil Carret, and many others became rich in stocks using plus,minus,multiply, divide. It is only the rocket scientists who have to justify their high salaries in Wall Street, and have to come up with high-falluting derivatives as an euphemism for gambling instruments, to sell to the Proctor and Gamble's of the world, that use high math. (Please take this with a joke. I really think some derivatives (only some) make sense. And Black-Sholes deserve the Nobel Prize award. It's just that I've become well-off (okay, rich) using simple math, without calculus and covariance. And I think derivatives are overrated and designed to make the casino house (the investment banks) profitable) The above computations assume the discount is at 20 percent. Seth can probably give you the correct discount that is going on in the market right now. But all you have to do is plug in the discount to the above computations. Secondly, this discount changes with respect to interest rates, time till maturity, stock price of underlying equity, etcetera. The reason it is not really worth the time, is because I think the movement of MRVC's stock price ultimately follows earnings and performance of the company primarily. If MRV fails, all bets are off. If it succeeds (which i believe it will), then this bond convertible will turn out to be a good deal. What I just described means two things: 1. Bond holders must hold until maturity or conversion to take advantage of this arbitrage-like position. 2. If bond holders from now until maturity, decide to sell the bond to someone else, they would have to cover. I hope this makes sense. And Seth can correct me. It's been a long time since I dealt with convertibles and derivatives. My interests are really in equities and technology.