|
J. P. Morgan Rolls Dice on Microsoft Options
Microsoft, in a shift that could be copied throughout the
technology business, said yesterday that it plans to stop
issuing stock options to its employees, and instead will pro-
vide them with restricted stock.
Though details of the plan still aren’t clear, J. P. Morgan
effectively plans to buy the options from Microsoft employ-
ees who opt for restricted stock instead. Employee stock
options are granted as a form of compensation and allow
employees the right to exchange the options for shares of
company stock.
The price offered to employees for the options pre-
sumably will be lower than the current value, giving
J. P. Morgan a chance to make a profit on the deal. Rather
than holding the options, and thus betting Microsoft’s
stock will rise, people familiar with the bank’s strategy
say J. P. Morgan probably will match each option it buys
from the company’s employees with a separate trade in the
stock market that both hedges the bet and gives itself a
margin of profit.
For Wall Street’s so-called rocket scientists who do compli-
cated financial transactions such as this one, the strategy behind
J. P. Morgan’s deal with Microsoft isn’t particularly unique or
sophisticated. They add that the bank has several ways to deal
with the millions of Microsoft options that could come its way.
The bank, for instance, could hedge the options by short-
ing, or betting against, Microsoft stock. Microsoft has the
largest market capitalization of any stock in the market, and
its shares are among the most liquid, meaning it would be
easy to hedge the risk of holding those options. J. P. Morgan
also could sell the options to investors, much as they would
do with a syndicated loan, thereby spreading the risk.
Source: Jathon Sapsford and Ken Brown, The Wall Street Journal,
July 9, 2003. Reprinted with permission. © 2003 Dow Jones & Com-
pany, Inc. All rights reserved.
WORDS FROM THE STREET
bod61671_ch21_722-769.indd 752
bod61671_ch21_722-769.indd 752
8/1/13 8:11 AM
8/1/13 8:11 AM
Final PDF to printer
C H A P T E R
2 1
Option
Valuation
753
When firms sell credit default swaps
(see Chapter 14, Section 14.5), the
implicit put option is even clearer. Here,
the CDS seller agrees to make up any
losses due to the insolvency of a bond
issuer. If the issuer goes bankrupt, leav-
ing assets of only V
T
for the creditors, the
CDS seller is obligated to make up the
difference, L 2 V
T
. This is in essence a
pure put option.
Now think about the exposure of these
implicit put writers to changes in the
financial health of the underlying firm.
The value of a put option on V
T
appears
in Figure 21.13 . When the firm is finan-
cially strong (i.e., V is far greater than L ),
the slope of the curve is nearly zero,
implying that there is little exposure of the
implicit put writer (either the bank or the
CDS writer) to the value of the borrowing firm. For example, when firm value is 1.75 times
the value of the debt, the dashed line drawn tangent to the put value curve has a slope of only
2 .040. But if there is a big shock to the economy, and firm value falls, not only does the
value of the implicit put rise, but its slope is now steeper, implying that exposure to further
shocks is now far greater. When firm value is only 75% of the value of the loan, the slope of
the line tangent to the put value valuation curve is far steeper, 2 .644. You can see how as you
get closer to the edge of the cliff, it gets easier and easier to slide right off.
We often hear people say that a shock to asset values of the magnitude of the financial
crisis was a 10-sigma event, by which they mean that such an event was so extreme that
it would be 10 standard deviations away from an expected outcome, making it virtually
inconceivable. But this analysis shows that standard deviation may be a moving target,
increasing dramatically as the firm weakens. As the economy falters and put options go
further into the money, their sensitivity to further shocks increases, increasing the risk
that even worse losses may be around the corner. The built-in instability of risk exposures
makes a scenario like the crisis more plausible and should give us pause when we discount
an extreme scenario as “almost impossible.”
Do'stlaringiz bilan baham: | 
