Tumellano Sebehela

Valuing a Listed Property Fund or Trust on the Johannesburg Securities Exchange (JSE) Using a Real Options Technique

The empirical study was undertaken to critically analyse if there was any other value other than the calculated market value during the time of the merger of the two property funds listed on the Johannesburg Securities Exchange. In doing so, the real options technique is used, because according to option valuation theory, real options have the flexibility that traditional valuation techniques do not have. The optionality that existed in this case was due to one listed property fund merging with another listed property fund. The listed property fund that acquires the other fund will be exercising its call on the acquired fund. Most of the written research papers on optionalities within real estate market are on the option to develop on a vacant land or build a new building. It seems that there is not much literature on listed real estate funds and optionality at the moment. From South Africa’s perspective, there are relatively no research papers on real estate and real options. Normally, when an investor applies a hedging strategy, he or she buys the cheapest asset, selling the expensive one. In this case, it is recommended that the investor should exercise a long call option and short the underlying, as the price of the call option is relatively cheap than the of a Freestone Property Fund.

Share Price and NAV Diversion Shown by Put-Call Parity

This article illustrates concurrent values emanating from mergers in the REIT industry. Prior studies on REIT mergers focused only single merger outcome(s); thereby, ignoring other existing concurrent values. Concurrent values are disentangled using game theory. Results illustrate embedded dynamism of option values linked to game strategies.

Randomised Exchange Option

This article extends the Margrabe formula such that it is suitable for accounting for any type jump of stocks. Despite the fact that prices of an exchange option are characterised by jumps, it seems no study has explored those price jumps of an exchange option. The jump in this article is illustrated by a Poisson process. Moreover, the Poisson process can be extended into Cox process in case there is more than one jump. The results illustrate that incompleteness in an exchange option leads to a premium which in turn increases an option value whilst hedging strategies reveal mixed-bag type of results.

A Stochastic Model for Corporate Costs

Prior formulas used to model airline costs do not account for flexibility of airline costs. Airline costs, specifically variable costs tend to change over a given financial period. That is, variable costs tend to be stochastic in nature. This paper illustrates that when one models interaction of airline costs in a risk neutral world the resulting combination is suitable for pricing costs. Other than accounting for stochastic nature of airline costs, short straddles illustrate how airline costs change with change in moneyness of a combination.Prior formulas used to model airline costs do not account for flexibility of airline costs. Airline costs, specifically variable costs tend to change over a given financial period. That is, variable costs tend to be stochastic in nature. This paper illustrates that when one models interaction of airline costs in a risk neutral world the resulting combination is suitable for pricing costs. Other than accounting for stochastic nature of airline costs, short straddles illustrate how airline costs change with change in moneyness of a combination.

Cash Risk Arbitrage

This study explores volatility smiles when stock market information is lagged, specifically in the REIT industry. A usual requirement is that REITs can only disseminate information relating to their property valuations once per year; therefore, this leads to the lagging effect. Within the context of exchange options (i.e. mergers), it seems that no study has researched on this theme. This article uses the Black & Scholes model to calculate implied volatilities and their corresponding implied options to illustrate arbitrage opportunities when exchange options emerge. The results illustrate that implied volatilities are different from non-implied volatilities. Further, arbitrage is still higher among REITs as opposed to other capital market instruments. Finally, just like other capital market instruments, REIT acquisitions generate alpha.

Growth Options Computation

This article models mergers as exchange options where acquirers offer stocks and/or cash to target firms in exchange of acquiring some shareholding in target firms. Mergers analysed in this article happen between homogeneous entities. The B-S and Margrabe models are used to price cash and stocks (including stocks and cash) deals respectively. The M&A traits are grouped as conflict of interest, market growth, funding and specialisation. Regression results illustrate that exchange options react to M&A characteristics differently. Thus, the results are beneficial to both sell-and buy-side investors in terms on how one manages merging firms. The goodness of fit suggests that strategic acquisitions played important roles.

Portfolio Formation Memory

Real estate investment trade (REIT) memory as illustrated by variations including their Greeks tend to vary during the [0;−32] window of portfolio formation, i.e. acquisitions. This is partly due to acquisition activities and intensity which tend to be “higher” during the time to expiration. Prior REIT studies explored variances based on long-term measures without focusing on the discrete nature of variations. This article, empirically presents discrete variations at different points in time. Results illustrate that memory decreases as time to expiration approaches maturity. Given high intensity during acquisitions, one infers that memory illustrated in this paper is likely to be optimal one.

Conditional-Exchange Option

The option side of Put-Call Parity has been explored by prior studies but its algebraic side has not been illustrated before. This article converts Put-Call Parity parameters into algebraic ones in order to derive transformed arbitrage-free formula. Interestingly, inverse Laplace transform and Put-Call Parity are similar in the sense that parameters of both formulae are at least zero. The results illustrated that transformed arbitrage-free formula is discrete in nature.

Derivatives Hedging: SASOL (Pty) Ltd. as an Example

The empirical study analyzes derivative hedging strategies that can be implemented for an investor who has been holding SASOL (Pty) Ltd.’s stocks before February 1999, in relation to that of JSE Top 40 Index. Moreover, as the relationship between SASOL’s stock and the JSE Top 40 Index changes, this empirical report recommends a different derivative hedging strategy based on calculations and the relationship of the two variables-SASOL (Pty) Ltd. and the JSE Top 40 Index. A correct execution of a derivative hedging strategy does not mean that no losses will be incurred, but that ideally, the overall net position of the derivative hedging strategy should be positive. Each investment portfolio needs a tailor-made derivative strategy that fits it well. Furthermore, for hedging strategy to work well, it needs proper monitoring by a skilled professional.