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Simple formulae for valuing stock conversion options

Published online by Cambridge University Press:  20 April 2012

P. M. Carroll
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Extract

It is quite common for stocks (usually loan stocks) to be issued by companies and purchased by investors, which include among their terms an option to convert at some future date into other stocks (usually ordinary shares) on specific terms. Such options obviously have value, but I am unaware of any simple published method for estimating the value of such options in practical cases. The purpose of this note is to suggest a formula, based upon easily understood estimates of the future market prices of the stocks in question, which may be applied readily in practice to estimate the value of such options.

Type
Other
Information
Journal of the Institute of Actuaries , Volume 101 , Issue 1 , June 1974 , pp. 97 - 101
Copyright
Copyright © Institute and Faculty of Actuaries 1974

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