Tlb - Arb Update

Discussion in 'Trading' started by livevol_ophir, Feb 2, 2010.

  1. livevol_ophir

    livevol_ophir ET Sponsor

    The first blog about this Arb is here:
    This was picked up by Bloomberg.

    TLB is trading 13.26, BPW 10.39.

    In order to back out an implied borrow rate, I have included the Options Tab snapshot in the article.

    March 15 Reversal (fair value)
    Buy Calls: 0.325
    Sell Puts: 2.30
    Synthetic Long Stock: 15 + 0.755 - 3.15 = 12.325
    Reversal Receives: 13.26 - 12.325 = 0.935
    That is an implied borrow rate to March expo of: 60%

    So buying BPW 10.39 and selling TLB @ 13.26 earns $2.97 - cost of carry (0.935). Total "arb" is $2.035 per share. Of course this has a lot of risk with the short stock and the assumption that you can hold that short TLB to march expo is quite a leap given the buy in risk. Also, the conversion ratio is now 0.9 (the minimum). So in fact you are receiving 0.9*13.26 = 11.93 (The target was $11.25). So the actual arb is 11.93 - 10.39 - 0.935 = 0.61.

    You could also purchase 1 share of BPW for 10.39 and hold it until the conversion of shares. If TLB stays here, you sell that share of BPW out @ 11.93 for $1.54 arb without the risk of being short stock or paying a negative rate. But... TLB could be much lower by then... If you think TLB will remain at this price or within .93 (i.e. the cost of carry) then you would skip the sale today and wait for the share conversion. That replaces borrow and buy in risk with naked delta risk.

    Also, there is a risk that this doesn't go through - then you would be left with a bunch of BPW stock and now hedge.

    Details and further analysis here: