This view is likely to have been the basis for the Board's decision to reduce the focus on the
Black-Scholes and binomial models as the accepted option-pricing technologies.
In Custom Chrome, the Ninth Circuit stated that,"[t]he problem in valuing the warrants stems from the combination of the general speculative nature of options aid the related difficulty of determining precisely what effect options granted for OID have on a core loan transaction." The court concluded that any well-established and reliable method for determining the value of options may be used in determining the warrants' value, such as (1) comparing the total debt instrument's value to the published values of comparable debt instruments of other issuers; (2) estimating as a multiple of earnings before interest and taxes the present value of the portion of the company that may be purchased by exercise of the options; and (3) using the
Black-Scholes method.
FASB said it wanted to do more work on determining how options should be valued, as the
Black-Scholes model might not be the best approach.
As such, strategic corporate investment options can resemble European call options and may be analyzed using a
Black-Scholes Model of Option valuation.
The
Black-Scholes formula and other option valuation models, he noted, were not available when the current regulations under section 83 were issued.
"Most experts believe the
Black-Scholes pricing model does not provide an accurate, reliable or consistent measurement of the fair value of stock options," says Chambers.
To estimate the fair market value of options, companies could use an option-pricing model such as the
Black-Scholes, which is widely used to price stock options sold in open markets.
First, they model some of the factors that help determine how many stock options firms will grant in terms of the standard
Black-Scholes value of those options.
We show how these options can be valued as portfolios of standard and compound options written on the stock of an otherwise similar company without warrants and derive a closed-form solution for the
Black-Scholes model.
(1.) Actually the
Black-Scholes (1973) model assumes that the risk-free rate is constant.
Such an upper bound would provide a useful point of reference for any proposed method of reporting or determining a particular firm's ESO cost, and it would help estimate the overstatement that results from applying the benchmark
Black-Scholes model with the holding period equal to the contract life.(1) The upper bound is determined by identifying a price at which a portfolio exists with returns that dominate the employees' returns from holding the unhedged ESOs.
