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Technology Stocks : Ascend Communications (ASND) -- Ignore unavailable to you. Want to Upgrade?

To: Raj who wrote (51488)	8/3/1998 11:46:00 PM
From: Sanzen	Respond to of 61433

Raj, Thank you for putting together the formula. Looks like the arbitrage is small but may be still worth a try. Here's the deal: Let x = price of ASND Let y = price of SRA Let r = interest rate for 3 months = anual_rate/4 Assume deal is 1 SRA = 0.75 ASND => y = 0.75x Then for a zero risk no arbitrage: 0.75x = 1y + ry x/y = (1+r)/.75 Lets say the margin rate is 7%. Therefore r = 0.07/4 = 0.0175 x/y = (1+0.0175)/0.75 = 1.36 1.e 1 ASND = 1.36 SRA if ASND trades at 46.8125 then SRA (risk-free) = 46.8125/1.36 = 34.42 Premium at close = 34.42 - 33.75 = 0.67 Thus for each margin rate you can compute the risk premium