salvatuti escribió:ARGENTINA | REASSESSING GDP WARRANTS VALUATION. There has been a reassessment of Argentine credit risk in terms of whether Argentina can continue to deliver double-digit returns and subsequent profit taking after credit spreads have normalized. The recent adverse headlines of more market manipulation/intervention on the controversy over inflation statistics also was a disappointment of any more friendly policy shift from the Kirchner Administration. On the context of a re-election of President Kirchner, this suggests that the positive credit momentum wanes for any centrist policy shift. Even on the context that Argentina converts into a carry trade, we still like the return potential on the GDP warrants. There is a high probability of two upfront payments on high GDP growth last year (8.4%) and this year (6.6%), for cumulative payments of 9.5 points (NPV of 8.7) against current market prices of 15.0. We just don’t see a scenario whereby fair valuation estimates are not much higher than current prices. The primary constraint on valuation is the discount curve with any longer dated payments heavily discounted. However, our conservative jump diffusion process consistently simulates up-front payments that would suggest fair valuation of around 24.5 based on up-front GDP growth of 8.4%, 6.6%, 3.5% and 3.5% from 2010-2013 and around 2 other longer dated payments. Our simulations constantly show upfront payments that are then constrained for the payment cap. It is no coincidence that GDP warrants are always typically bought on weakness for their perception of structural undervaluation to fair valuation. It just doesn’t seem logical that there aren’t at least a few more payments over the 20-year cash stream of the warrant with the payments growing in face value from the nominal value of the GDP statistics. From a trading strategy we have to assume that the stochastic process is heavily penalized with reluctance for investors to anticipate fair valuation. On the most conservative approach to penalize the stochastic process, we take two standard deviations from fair valuation on the histogram results of the 10,000 simulations which suggests that GDP warrants should trade at least at 17.0
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