TABLE OF CONTENTS This chapter contains a case study of a complicated equity option called a CVR that was an important part of an M&A deal. The CVR will be considered in some depth in order to give an idea of the complexity that sometimes occurs [i], [1]. Many of the topics in this chapter are quite general. A variety of interesting theoretical points arose while pricing the CVR. These included conditions under which an option will or not be extended in time.
We use the present grammatical tense in order to dramatize the situation as it unfolded at the time. Letters ABC, DEF, XYZ are used generically to describe the players. Various specific topics are described in the footnotes.
The ABC Corporation wants to acquire DEF Corporation. ABC is willing to pay the DEF stockholders cash along with ABC stock. From the point of view of DEF, the risk is that the ABC stock could decrease in value. This might happen for any of a number of reasons. ABC may have to issue extra debt, leaving...
