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To: BWAC who wrote (61156)8/29/2002 4:26:23 PM
From: rkral  Respond to of 77400
 
OT ... BWAC, "estimates of estimates of an estimate?"

LOL. That's very perceptive of you .. and I can understand that viewpoint. I prefer to think of it as one level of estimates fed to a mathematical model based on statistics (probabilities).

As you probably know, option life, risk-free interest rates over the estimated option life, stock price volatility over the estimated option life, and dividends over the estimated option life must all be estimated. (That may require a re-read.) To be reasonably accurate at all those estimates is a difficult task indeed. The only "for sure items" are the exercise price and market price on the grant day.

Now the Black-Scholes model is based on exacting mathematics. But at the very base is the assumption that probability of different price changes is distributed log-normally. But apparently this assumption is quite accurate. To my knowledge, there has not been an adjustment since 1973.

Ron



To: BWAC who wrote (61156)8/29/2002 4:31:56 PM
From: GVTucker  Respond to of 77400
 
Yeah, Black Scholes is certainly a guess, not a fact.

But what in accounting is absolute fact? Not much.

For example, Black-Scholes does a much better job estimating the value of an option than a FASB chart estimates the life of a plant or a piece of equipment.

That doesn't mean that depreciation isn't a legitimate cost of doing business. It is.

So is awarding options to employees.


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