I've just been issued 4 lots of Pac andes R (R for rights) in my CDP account because I had 4 lots of pac andes mother shares before their book closure date. Today, Pac andes R began trading and it opens at 0.400.
I initially thought it's a good deal because to convert each rights to mother share, I have to fork out $0.52. Since the pac andes R are selling on open market at 0.40, I thought it's a great deal.
NOOOO!!
Above is a snapshot of the prices of pac andes mother share and pac andes rights. The mother share price is currently at 0.935 while the pac andes rights is trading at 0.420. If I buy 1 lot of Pac andes R at 0.420, I have to fork out $446.50 (420 + brokerage). I would then own 1 lot of pac andes R. If I want to convert it to mother share, I have to fork out another $0.52 per share, so to convert my 1 lot of pac andes R, I have to pay another 520 (0.52 x 1000). My total cost would be 966.50.
OR, I can buy 1 lot of pac andes mother share right away at 0.935 per share, giving me a total of $961.81 (935 + brokerage).
I actually save money by buying the mother share straight!! This means that unless the market price of pac andes R is substantially below the market price of mother share minus 0.52, it's not going to be better to buy the rights from open market.
In summary,
(market price of mother share - 0.52) > market price of rights + brokerage
then we buy the mother share instead of the rights
Conversely if
(market price of mother share - 0.52) < market price of rights + brokerage
then we buy the rights instead of the mother share
Simple? haha! I'm glad I thought this through, makes the whole thing a lot simpler now
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