Convertible Preferreds

So I read an article yesterday saying that Citi may let all us normal people in on the SWFs’ trade and issue their convertible preferred’s publicly. anyone know how to price these things?

Source of value is twofold: (1) 7% preferred dividend that’s senior to equity claims (2) option value of the covert option to price it, you’d have to decide on an appropriate risk-based discount rate for this level in C’s cap structure, among other things.

I realize that, I was curious about the actual model used…

“I realize that, I was curious about the actual model used…” You use whatever option pricing framework you want to price the convert option, you pick a discount rate probably by using a market rate for other Citi hybrids without the convert option, you discount your preferred dividends back by that rate, and the you add the option value to the DCF value.

newsmaker Wrote: ------------------------------------------------------- > “I realize that, I was curious about the actual > model used…” > > You use whatever option pricing framework you want > to price the convert option, you pick a discount > rate probably by using a market rate for other > Citi hybrids without the convert option, you > discount your preferred dividends back by that > rate, and the you add the option value to the DCF > value. Would this work though? 1) You wouldn’t have a fixed strike price unless conversion is based on par value. 2) Does the option ever expire? You certainly can’t have infinite conversion premium. 3) Also I believe that there’s only a given range of common values where you can convert so I guess you’d have to treat it like a call spread…