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Nil-paid rights and excess rights: Some numbers by LP.

Monday, September 20, 2010

LP, blog master of Bully the Bear, and owner of the infamous cbox therein, has this to share:

I think that people don't understand that the price of the nil-paid rights (right shares that are entitled to you based on your holdings upon XR of the mother share) is priced as this:

Price of mother share - 0.155

If it's lower than the above formula, it opens a chance to arbitrage the difference by buying the nil paid rights or shorting the mother share. Either way, equilibrium will be achieved to bring the price of the nil-paid rights back to the stated formula.

So, if the mother share is trading at 0.225, the nil-paid rights will be priced at 0.07. You pay 0.07 PLUS brokerage to get the nil-paid rights, then you pay at the atm 0.155, so the price will be 0.225 excluding brokerage.

Or on the other hand, if you can buy the nil-paid rights at 5 to 6 cts, you are buying the mother share at 0.205 to 0.215. Good deal to me even if you have to pay brokerage!

If you don't want to do this during the nil paid rights trading period, you can always opt NOT to pay any brokerage and paying 0.155 to apply for excess rights. But you might not get it.

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