Theoretical Fail Value (TFV)
Below you can find all the news related to the launch of the Theoretical Fair Value, a metodology to calculate the fair value of equity derivatives in case of Public Tender Offer or Merger.
- all the following amendements will be effective as of Monday November 5th, 2007 -
As of November 5th, 2007 Borsa Italiana introduces the Theoretical Fair Value (TFV), a methodology to calculate the fair value of open positions on stock option and/or future contracts following the delisting of underlying shares due to Public Tender Offer and/or Exchange Offer or Merger.
Under exceptional circumstances, when the following methodology might not guarantee the financial equivalence, Borsa Italiana reserves the right to evaluate every adjustment in order to be coherent with the principles of the following methodology, promptly providing communication to the market.
Why introducing TFV?
- Respond to clients’ needs: active traders (particularly those developing longer maturities trading) have expressed many times the need to obtain recognition not only of the intrinsic value of stock options and futures, but also of the time value of the position
- Enhancing trading in long-term maturity options: traders can take position on stock options up to 36 months, with the guarantee that they will be recognized the remaining time value of the options in case of delisting of the underling following Public Tender Offer and Merger
- Align to international standard: TFV is identified as an important driver to support the harmonization process of corporate actions policy among European Exchanges
When does TFV apply?
In the event of illiquidity of the underlying asset as a consequence of a Public Tender Offer and/or Exchange Offer or a Merger, which causes a procedure for the revocation of listing or exclusion from trading, Borsa Italiana may:
- order the closure and cash settlement of open positions on the basis of the TFV(1) or
- substitute, in accordance with principles of financial equivalence, the security to be delivered with that of the bidder
using the following criteria:
Methodology: how does it work?
In order to calculate the Theoretical Fair Value, Borsa Italiana shall consider:
|
|
|
|
|
the arithmetic mean of the volatilities implicit in the daily settlement prices provided by CC&G on the ten days before the date of the announcement of the offer (5) |
|
those estimated consistent with the residual life of the contract (6) by CC&G and used to calculate the daily closing prices on the day preceding the delisting of the stock option and/or futures contracts |
|
Euribor, consistent with the residual life of the contract, observed on the last day before the closure and cash settlement of stock option and futures contracts |
Calculation(3) In order to calculate the TFV the value of the underlying is defined taking into consideration some variables (exchange rate, official price, etc.), used the day preceding the delisting of the stock option and stock futures contracts.
(4) In order to define the volatility, in case of abnormal situations, Borsa Italiana may apply adjustments using the linear interpolation.
(5) The date of the announcement of the offer will be the date on which the bidder issued a press release (article 114 d.lgs. n. 58/1998) informing the market of the essential financial elements of the transaction. In cases of revision of offers or competing offers recourse will be made to the volatilities calculated at the time of the first Offer. In case of merger, the date of the announcement (article 114 del d.lgs. n. 58/1998) is the date in which the essential financial elements of the corporate action are communicated to the market.
(6) In order to define the residual life, Borsa Italiana uses the solar calendar.
Timetable
The timetable related to the calculation of the TFV in case of closure and cash settlement of open positions due to a Public Tender Offer and/or Exchange Offer or a Merger is summarized as follows:
***
For further information, please download the Theoretical Fair Value flyer.