Decision Options, LLC |
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Data 2 Decisions |
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DoESO - Methodology |
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DoESO incorporates a powerful valuation engine developed for Decision Options general purpose valuation framework, DoOptima, currently in use in large companies for risk and portfolio management. DoOptima utilizes a lattice (numerical) technique to solve complex real options (and combination of options) problems encountered in private assets such as R&D programs, technology development, power plants etc. More information on DoOptima is available at www.decisionoptions.org/dooptima
Because DoESO shares a valuation engine created with significant flexibility to solve complex real world options, it can closely reflect any information that the company has on its options awards such as exercise patterns (based on time and stock movements), vesting period, black outs, changing interest rates and volatility (term structure) and current and expected dividend policy. It is also capable of finding the best cross section of various constraints and known information. For example, both a time based and stock price based exercise pattern can be prescribed independently and DoESO will value the option incorporating the information content in both data sets. As such, it is a powerful way to closely model the real value of the ESO grants in companies. This value is substantially different from closed form solutions such as Black-Scholes that makes constraining assumptions around holding periods, dividends and interest rates. DoESO is also more flexible than bionomial tree techniques allowing path dependent behavior and providing more outputs around, average life of the option and percentage of the options expected to be exercised in the money. DoESO also provides a simple and intuitive user interface for data entry and requires little training for those familiar with Black-Scholes or other conventional options pricing techniques.
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DOESO is FULLY COMPLIANT WITH THE PROPOSED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS EXPOSURE DRAFT on Share-Based Payment (an amendment of FASB Statements No.123 and 95)
(a) DoESO valuation technique is applied in a manner consistent with the fair value measurement objective and the other requirements of this statement and is based on established principles of financial economic theory and generally accepted by experts and reflects any and all substantive characteristics of the instrument. (b) DoESO is based on a numerical technique (lattice method) and is fully consistent with accepted economic theory. (c) DoESO output will reduce to closed form solution results if the assumptions are set as constraining as those prescribed in closed form solutions allowing easy auditing trail. (d) DoESO takes into account exercise price, expected term including employee exercise patterns, current price of stock, expected volatility, expected dividends and risk free rate. It also allows expected variations in interest rates, volatility and dividend policy. Dividends can be specified as discrete as is the case in most companies. Special dividends, vesting/black-out periods and other known information can also be incorporated.
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Decision Options, LLC 94 Anchorage Circle Groton, CT 06340 |
