Also have a few comments aimed at increasing clarity in a potential deal.
1. Embedded LDO calls in the Bond
As discussed, the convertability of the bond amount into LDO at 3x~5x current price is de facto the same as Lido giving an out of the money LDO call option to the bond purchasers as part of the deal.
In my view, this is a much bigger part of the deal than it may seem at first. I did a quick model on how what value these calls may have, presented bellow:
Assumptions:
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We used standard Black-Scholes to try to value the options. The BSM has limitations and there are critics on its accuracy especially in pricing longer term options (which is the case).
However, it’s the most widely used model and should give at least a base estimate. -
For LDO spot price, we used the LDO 30-day TWAP instead of today’s price. At the time this was computed, the TWAP was $1.152.
Daily price is to volatile for these estimates to be useful for more than a week and a TWAP will almost always be fairer for both sides. -
Implied volatility is, obviously, the hardest input for the Black-Scholes model. Since there are no liquid option markets for LDO from which to extract IV from option prices, we used the historical volatility as the estimate for implied volatility.
Since this isn’t perfect, we looked at average LDO HVs from tradingview and used a wide range around them (from 100 to 200) for different estimates.
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As for other assumptions, we used a 3% annual risk-free rate to discount the options. This value could be higher or lower but either way it wouldn’t affect the outputs much so it shouldn’t be a big focus here.
Pricing estimates
- Under these assumptions, the following tables contain what the present value of the LDO calls would be, a function of the chosen strike price (to be determined in the potential deal terms) and implied volatility (multiple possibilities used as explained above):
The goal of this analysis is to provide more detail to the Lido (and Solv) community regarding what this structure entails 