What is the market-implied chance of closing?
A plain guide to the number on every deal: what it is, how to read it, and the maths.
Tracking Alpha
What it is
A calculation from market prices: the chance of closing at which holding to the expected close would earn what Treasury bills pay over the same time.
How to read it
r is the simple return at the 3-month T-bill rate from the delayed close's date to the expected close, and the break price is the undisturbed price. Without a bill rate or an expected close it is the plain (price − break price) ÷ (offer − break price), and says so.
The Implied chance column and the deal page show it. It is always labelled as a calculation from market prices, never as our view of whether the deal closes.
How it is worked out
(price × (1 + r) − break price) ÷ (offer − break price)
A worked example
Example, with made-up numbers
Offer $50.00, price $48.50, break price $38.00, bills at 4% a year for half a year, so r = 2%.
- Plain:(48.50 − 38.00) ÷ (50.00 − 38.00) = 87.5%
- With bills:(48.50 × 1.02 − 38.00) ÷ (50.00 − 38.00) = 95.6%
