QIN (ASX) Shorters using Warrants to limit their risk

Originally posted by hottuna ↑

yep I'm aware of how they came to be, but a convertible bond is effectively a normal bond with an option attached to it - the only difference with this issue was that the warrants were detached and separate to the bond, the economics and payoffs are very similar. The people who trade and issue this type of debt are convertible arbitrage desks at investment banks and specialist conv arb hedge funds.

I also went back and plugged in how much those warrants were worth at issue.

As you can see from the chart TFC was in a bit of a volatility lull at the time of about 35%, 8 years to exercise and it was trading at around 91c according to the announcement. That made the options worth (very back of cigarette packet) about 19c each, or 7c per $1 of bond. Use the long term average of about 45% volatility and you get 27c each, or 10c per $1 of bond. 10% makes a bond fund manager very horny!

Either way, those 55m warrants are now worth approx $11m, and at ~1.50 they were worth double that. I'd bet that a convertible bond fund manager - or any bond manager worth their salt - would have hedged that exposure.

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Actually the underwriters of the 11% bond, and the vast majority of the buyers of the bond were not cvt guys, and did not treat this as a cvt. This was a High Yield deal, with penny wts (only a term, the cost was 0) included to sweeten the offering.
The problem with ascribing anything more than intrinsic value to the wt is that there was/is nobody that wants to pay that. Knowing that you can't sell the wt has to make the portfolio manager question the applicability of the Black Scholes pricing model. It sounds fine, but when you have hedged up the common at $0.91, or $1.00, or $1.27, and the stock never reaches $1.28, but stays above your cost and below your strike, you aren't worth much salt.
That 10% you are talking about would make a PM very horny if there was a way to realize it. The only time you can realize the time value of your warrant is if you sell your wt. The 55mm wts are not worth anything if you cannot sell them.