Hi Peter,
Thanks for your answer about the options. I've never had any luck trying to figure them out. It just intuitively seemed that they represent a future price, which compared to current price might give some idea of how much risk the market sees in the company's future earnings potential. I think what you're saying is true, that the option price reflects current volatility, but that in turn surely has to do with how certain the market feels about the company's prospects. But it would be impossible to quantify this, I guess.
Which discount rate to use on future earnings certainly is a vexing question. I prepared a lot of income analyses for rental properties in the late 80s. I remember seeing my work (done for investors) used with higher discount rates in property tax rebate applications to lower the estimated income and so property value and so real estate tax. In the end, of course, in many cases no income materialized at all, since all our assumptions about occupancy and expected rent increases turned out to be wrong. While sorting through all the prospectuses in the early 90s, after the real estate market had crashed, I remember looking at them with awe that anyone could be so naive to assume that rents would increase 10% annually, the buildings would stay full, the mortgages would be paid off, the owners' equity would double while they were writing big losses off their taxable income...
This might be why I take all these estimates with boatloads of salt.
Bruce |
