Adjusting Option Contracts for Seasoned Equity Offers - the Example of European Call Options

Bankarchiv - Zeitschrift für das gesamte Bank- und Börsenwesen, Vol. 53, No. 10, pp. 691-701, October 2005

29 Pages Posted: 13 Mar 2009 Last revised: 15 Mar 2009

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Christian Lazar

University of Marburg - School of Business & Economics

Date Written: February 8, 2005

Abstract

New shares of seasoned equity offerings are often issued with a sustainable discount. This discount implies a dilution in the sphere of old shareholders. Now, at least in Germany the old shareholders are commonly compensated for the dilution effect by issuing rights. However, the dilution also affects the owners of equity derivatives.

In a simple model we propose economic reasonable conditions for adjustments of European equity call option contracts after a seasoned equity offering issuing new shares. Therefore, we separate the effect of the equity increase and the effect of altering the leverage and operational risk. In particular, we discuss two suggested methods to adjust the contract terms of call options and analyse the dilution effects for the adjustments proposed by the 'Wiener Borse' and the EUREX.

Note: Downloadable document is in German.

Keywords: Seasoned equity offfering, equity option, option contract

JEL Classification: G3

Suggested Citation

Rapp, Marc Steffen and Lazar, Christian, Adjusting Option Contracts for Seasoned Equity Offers - the Example of European Call Options (February 8, 2005). Bankarchiv - Zeitschrift für das gesamte Bank- und Börsenwesen, Vol. 53, No. 10, pp. 691-701, October 2005 . Available at SSRN: https://ssrn.com/abstract=663901

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

Christian Lazar

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, 35032
Germany

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