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The standard practice of accounting for company-specific risk is to leave expected cash flows unchanged and add a CRSP to the discount rate. A preferred methodology would be to adjust expected cash flows for the economic effect of company-specific risk and leave the discount rate unchanged. In this webinar, we will set forth the methodology for adjusting cash flows using a quant-based rather than a judgement-based methodology. We will then calculate call option value via a version of the Black-Scholes Option Pricing Model (BSOPM) that allows jumps. We will also address common errors encountered when using the BSOPM.
Program Agenda
CRSP definition and current industry practices
Typical appraisers share and option value calculation
Getting the dividend yield right
Discrete-time to continuous-time computations
Stock price equations - Black-Scholes model
Jump size mean, jump size volatility, and jump frequency
The Black-Scholes option pricing model in a jump-diffusion world
Summary
Learning Objectives
How to adjust cash flow using a quant-based methodology
Learn how to calculate options via the Black-Scholes Pricing model
Common Errors when using BSOPM
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