Leema Enterprises, Inc. - Page 8




                                        - 8 -                                         

          further limits the risk to an investor, because the price                   
          differential between the legs of one spread would have to change            
          with respect to the price differential of the legs of the other             
          spread before there would be a net economic effect.                         
                    (1)  Merit's Nominal Pricing Formula                              
               Because there was no publicly traded T-bill options market,            
          Dr. Richartz engaged Dr. Leonard Auerbach to develop a pricing              
          system for the options.  Dr. Auerbach has taught at the University          
          of California at Berkeley, the University of Southern California,           
          and St. Mary's College.  Dr. Auerbach adapted the Black-Scholes             
          model formula for pricing stock options as the basis for devising           
          a pricing formula for Merit's T-bill and T-bond options.  The               
          Black-Scholes formula determines stock option values on the basis           
          of the price of the underlying security, the length of the option,          
          the strike price, the risk-free interest rate, and volatility.  See         
          Black & Scholes, "The Pricing of Options and Corporate                      
          Liabilities", 81 J. Pol. Econ. 637 (1973).  Dr. Auerbach developed          
          and repeatedly revised a formula for Merit which could be used to           
          calculate a price estimated to be equal to the price that would             
          have applied in an open market.                                             
                    (2)  Merit's Income Structure                                     
               Merit earned income from operating its option markets in two           
          ways. First, it collected a bid/ask differential on opening                 
          positions.  The bid/ask is the difference between the price a               
          dealer will pay for an item and the price at which he will sell             
          that item.  The difference between the price paid to purchase an            

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  Next

Last modified: May 25, 2011