Contingent Value Rights

Contingent value rights provide investors with the right to sell stocks for a fixed price, and thus derive their value from the volatility of the stock and the desire on the part of investors to hedge away their losses. Put options, which are traded on the option exchanges, give their holders a similar right to sell the underlying stock at a fixed price. There are two primary differences between contingent value rights and puts. First, the proceeds from the contingent value rights sales go to the firm, whereas those from the sale of listed puts go to

Contingent Value Rights:

A contingent value right (CVR) provides the holder with the right to sell a share of stock in the underlying company at a fixed price during the life of the right.

private parties. Second, contingent value rights tend to be much more long term than typical listed puts.

There are several reasons why a firm may choose to issue contingent value rights. The most obvious is that the firm believes it is significantly undervalued by the market. In such a scenario, the firm may offer contingent value rights to take advantage of its belief and to provide a signal to the market of the undervaluation. Contingent value rights are also useful if the market is overestimating volatility and the put price reflects this misestimated volatility. Finally, the presence of contingent value rights as insurance may attract new investors to the market for the common stock.

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