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musicgold1
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Joined: March 25th, 2008, 3:40 pm

Valuing Goldman Sachs warrants

September 24th, 2008, 4:44 pm

Hi,I was trying to figure the value of the warrants Berkshire Hathaway received as part of its recent $5B equity infusion in Goldman Sachs. My question is regarding the volatility estimate. How do I get the implied volatility for the 5 year period - Sept 2008 to Sept 2013?I used the following information and the OVX function of Bloomberg to calculate the warrant value. 1. # of warrants – 43.5 million 2. Strike - $1153. Current price - $127.984. Exercise type – American5. Period – 5 years6. Volatility – 45% (based on the observed volatility of last 400 days).With these parameter, the function is giving me a value of $56.48 per warrant, i.e., approximately $2.45 billion for all the warrants.Thanks,MG.
 
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daveangel
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Valuing Goldman Sachs warrants

September 24th, 2008, 8:26 pm

i think the vol estimate is too high and I would also include the dilution effect
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musicgold1
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Valuing Goldman Sachs warrants

September 25th, 2008, 6:16 pm

daveangel,Thanks.Quotei think the vol estimate is too high. To come up with my volatility estimate of 45%, I looked at a couple of sources. The TRMS function of Bloomberg provides the following data. 1. Last 3 month historic volatility – 75.9%2. Last 12 month historic volatility – 54.9%3. Last 1.5 year historic volatility – 40.1%4. Last 3 year historic volatility – 33%5. Last 7 year historic volatility – 26%The function also provides implied volatilities using at the money call options. 6. IV for 15 days maturity – 65.8%7. IV for 40 days maturity – 74.4%8. IV for 123 days maturity – 51.8%9. IV for 250 days maturity – 47.8%10. IV for 121 weeks maturity – 42.8%Given this, what do you think would be a correct volatility estimate? Quote I would also include the dilution effect. I thought the OVX function of Bloomberg accounts for the dilution effect.
 
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spursfan
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Valuing Goldman Sachs warrants

September 25th, 2008, 8:19 pm

one - we know that vols mean revert and relatively quickly - look back at October 1987, for instancetwo - how about taking the average of 3 and 7 year historic vols, say 30%three - but what you really want is an idea of the vol for the next 5 years (Goldman's regulated by the Fed, probably less geared)
 
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Siberian
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Valuing Goldman Sachs warrants

September 26th, 2008, 5:32 pm

QuoteOriginally posted by: spursfanthree - but what you really want is an idea of the vol for the next 5 years (Goldman's regulated by the Fed, probably less geared)Bingo spursfan!
 
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musicgold1
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Valuing Goldman Sachs warrants

September 30th, 2008, 3:16 pm

Thanks a lot folks.
 
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elio
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Valuing Goldman Sachs warrants

October 2nd, 2008, 10:57 am

BTW, what's the value? To have an idea... Something in between 2 and 3 billions?
Last edited by elio on October 1st, 2008, 10:00 pm, edited 1 time in total.
 
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musicgold1
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Joined: March 25th, 2008, 3:40 pm

Valuing Goldman Sachs warrants

October 2nd, 2008, 1:18 pm

Initially I was getting $2.45 B, with a 45% volatality assumption.
 
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musicgold1
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Joined: March 25th, 2008, 3:40 pm

Valuing Goldman Sachs warrants

October 2nd, 2008, 1:18 pm

Initially I was getting $2.45 B, with a 45% volatality assumption.
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