Rolls-Royce ETP values
Posted:Pricing of GraniteShares ETPs
In understanding the pricing of GraniteShares ETPs, it is important to understand the role of different parties.
- GraniteShares: is responsible for the daily value per ETP security, whose daily performance will track the underlying Solactive index, and includes fees and any adjustments. The daily value per ETP security is calculated following the market close and is a reference price for the start of next day’s trading.
- Market participants: provide prices to the London Stock Exchange during market hours: these will include market makers as well as investors who place limit orders on the order book. GraniteShares has no involvement in this activity.
Inputs into calculating the implied and actual value of GraniteShares 3x Short Rolls-Royce Daily ETP (3SRR) on 28 October 2020
Rolls-Royce closing price and 3SRR value as at 27 October 2020
On 27 October, the Rolls-Royce share price closed at 219p. On 28 October the Rolls-Royce went ex-rights, and the rights were valued at 143.85p. Adjusted for the rights, the Rolls-Royce share price at close of business on 27 October was valued at 75.15p (219p - 143.85p). On 27 October, the value of 3SRR was 62.32p.
Stop-loss mechanism
3SRR is priced off an index published by Solactive that has a stop loss mechanism that is activated if the underlying stock price moves by more than 16.67%. Based on the closing data on 27 October, the reference level for triggering the stop loss on 28 October was 87.70p [=75.15p * (1 + 16.67%)]
Stop-loss event
On 28 October at 10:59, the Rolls-Royce share price traded above the 87.70p level. This triggered a stop loss event and the index was suspended for a 10-minute observation period.
In line with the index rules, the index was on hold for a 10-minute period and Solactive took the highest observed price during that period as the new reference price, which was 95.18p (source Solactive).
At that level, the implied price for 3SRR was 12.49p.
3SRR at 11:10 = 12.49p [= 62.32 * (1 – 3 * (95.18p / 75.15p -1 ))
Implied value after the stop loss event
The index rules stipulate that, after a stop loss event, a “new trading day” should begin using the levels at which the index rebalanced as a reference. Consequently, the 3SRR price after 11:10 should have been based on the following formula:
3SRR after 11:10 = 12.49p * (1 – 3 * (Rolls-Royce price / 95.18p -1 ))
Rolls-Royce closing price and 3SRR value at close on 28 October
On 28 October, the Rolls-Royce share price closed at 84.54p with an implied value for 3SRR of 16.67p.
3SRR at close on 28 October = 16.68p [ = 12.49p * (1 – 3 * (84.54p / 95.18p -1 ))]
What would have happened in the absence of stop loss mechanism
Rolls Royce share price hit 101p at 11:21, or a 34.4% compared to the previous day’s close (101p/75.15p). If the stop loss had not been activated the product would have touched zero and would have been cancelled, leaving investors with worthless instrument.
Pricing on exchange on 28 October
There was a period during the day linked to the stop-loss event when 3SRR traded out of line with where we would have expected it to trade based on its implied value. The following sets out our understanding of what happened:
- When the stop loss event occurred at 10:59, the principal market maker removed its quotes, waiting to receive the rebalancing information from the index provider.
- The 10-minute observation was over at around 11:10. At that time the Rolls-Royce share price was trading around 93p with an expected value for 3SRR of 13.3p [ = 12.49 * (1 – 3 * (Rolls-Royce price / 95.18p -1 ))]
- However the market makers noticed large orders on the bid side way above that level, ranging around 23p to 27p initially and then the bid prices went up well above 30p.
- As trading was taking place in an orderly manner (i.e. there were market participants posting bid and ask orders), London Stock Exchange did not suspend trading.
- Given the above, the principal market maker returned to the order book at around 15:10, initially in small sizes, at price levels on the bid/offer that reflected the index rebalancing event. This resulted in the price gapping down to the levels that were observed until the end of the trading day, which were in line with the price levels that GraniteShares expected to see given the rebalancing event that had occurred earlier in the day.
Inputs into calculating the implied and actual value of GraniteShares 3x Long Rolls-Royce Daily ETP (3LRR) on 28 October 2020
Rolls-Royce closing price and 3LRR value as at 27 October 2020
On 27 October, the Rolls-Royce share price closed at 219p. On 28 October the Rolls-Royce share price was marked ex rights that were valued at 143.85p. Adjusted for the rights, the Rolls-Royce share price at close of 27 October was hence valued at 75.15p (219p - 143.85p). On 27 October, the value for 3LRR was 0.90p.
Rolls-Royce closing price and 3LRR value at close on 28 October
On 28 October, the Rolls-Royce share price closed at 84.54p with an implied value for 3LRR of 1.2422p.
3LRR at close on 28 October = 1.2422p [ = 0.9038p * (1 + 3 * (84.54p / 75.15p -1 ))]
Rolls-Royce shares marked ex-rights, 28 October
Following the approval of the proposed rights issue by shareholders, Rolls-Royce shares are marked ex-rights today (28 October).
Based on Rolls-Royce’s official closing price of £2.19 on London Stock Exchange on 27 October, Solactive, the index provider used by GraniteShares for its short and leveraged products, established a theoretical value of the right issues of £1.4385, which results in an ex-rights stock price for Rolls-Royce of £0.7515.
The indices used for GraniteShares 3x Long Rolls-Royce Daily ETP (3LRR) and GraniteShares 3x Short Rolls-Royce Daily ETP (3SRR) will be adjusted in such a way that on 28 October the daily performance of the two ETPs will be in relation to the movement of the underlying Rolls-Royce shares relative to £0.7515 (adjusted by daily fees).
Rolls-Royce rights Issue: Impact on GraniteShares ETPs
Rolls-Royce Rights Issue
Impact on GraniteShares 3x Long Rolls-Royce Daily ETP (3LRR) and
GraniteShares 3x Short Rolls-Royce Daily ETP (3SRR)
Overview
As part of its recapitalisation, Rolls-Royce is preparing to raise cash through a rights issue. Subject to shareholder approval at the General Meeting on 27 October 2020, Rolls-Royce’s shares will start trading ex-rights on 28 October 2020 (the ex-date).
How will rights issues impact 3LRR and 3SRR?
The total return indices tracked by GraniteShares Short and Leveraged ETPs use a methodology that aims to take account of corporate actions. In the case of a rights issue, the methodology assumes the rights are reinvested on the day before the ex-date so that the index value is unaffected at the opening of the market on the ex-date. In making this adjustment, the index neutralises the impact of the rights, just as the rights issue is neutral for investors in the underlying shares.
To put it another way, an investor with a £1,000 of exposure to either 3LRR and 3SRR immediately before the shares are marked ex-rights, still has a £1000 worth of exposure at the moment the shares are marked ex-rights.
With this index adjustment in place at the market open on 28 October and reflected in the price of both 3LRR and 3SRR, the two GraniteShares ETPs will track the daily performance of the underlying Rolls-Royce share price adjusted for the theoretical value of the rights as determined by the index provider.
How will the index be adjusted?
The index will be adjusted by a factor that takes into account the following:
- The closing share price on the day prior to the ex-date,
- The subscription price, and
- The impact of dilution.
Additional details are available in section “2.1.4.1 Rights Issue Adjustment in Standard Index” of the Solactive Equity Index Methodology
