Tuesday, February 2, 2010

TLB - BPW Arb Update

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

TLB is trading 13.26, BPW 10.39. The LIVEVOL™ Pro Summary is below.

In order to back out an implied borrow rate, I have included the Options Tab snapshot below (click to enlarge).

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... Since the cost of carry is ~$0.93, if you think TLB stays higher than this price - 0.93, then you would skip the sale of TLB now and wait unitl the conversion... That's replacing 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 no hedge.

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