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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 75.19-0.1%Jan 16 9:30 AM EST
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To: Lizzie Tudor who wrote (64154)6/1/2003 3:10:48 PM
From: Stock Farmer  Read Replies (2) of 77400
 
You guys don't like the fact that I think Google's "risk premium" (meaning a collection of statistical metrics including volitility, but not exclusive to volitility, please lets make that clear) makes Black-Scholes unworkable for IPOs?

No, we just think you don't know what you are talking about. There's a difference.

Black-Scholes works for IPOs just as easily as it works for moribund companies with a perpetual volatility of zero.

Key to Black-Scholes is the expected FUTURE volatility of the stock over the period. Not the PAST volatility.

You are suggesting that since there is no historical volatility from which to base an estimate of future volatility for a company like Google, that Black-Scholes does not work.

Which is gibberish. Can investors estimate a fair price at IPO? Do they have an expectation of return? Someone who knows what they are doing can imply a volatility from these two factors.

Absence of having had volatility in the past doesn't mean the stock doesn't have a volatility. It just means you can't use the one it used to have as a first approximation of expected future volatility.

And just because a stock exhibited a particular volatility in the past does not mean it will carry that volatility into the future.

If you don't know what you are doing then of course you would find Black-Scholes unwieldy. But that's a problem with you, not a problem with the tool.

John
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