OPTION VALUE CALCULATION AFFECTED COMPONENTS

The IASC recently recommended that employee compensation in the form of stock options be measured at the ‘fair value’ based on an option pricing model and the value should be recognized in financial statements. This follows adoption of SFAS No. 123 in the United States, which requires firms to estimate the value of employee stock options using either a Black‐Scholes or binomial model. Most US firms used the B‐S model for their 1996 financial statements. This study assumes that option life follows a Gamma distribution, allowing the variance of option life to be separate from its expected life. The results indicate the adjusted Black‐Scholes model could overvalue employee stock options on the grant date by as much as 72 percent for nondividend paying firms and by as much as 84 percent for dividend paying firms. The results further demonstrate the sensitivity of ESO values to the volatility of the expected option life, a parameter that the B‐S model or a Poisson process cannot accommodate. The variability of option life has an especially big impact on ESO value for firms whose ESOs have a relatively short life (5 years, for example) and high employee turnover. For such firms, the results indicate a binomial option pricing model is more appropriate for estimating ESO value than the B‐S type model.

This paper reviews the past research on option pricing, including the Bachelier option pricing formula, Black-Scholes model, and the Cox-Ross-Rubinstein (CRR) binomial option pricing model. Then some practical calculations are performed on the Black-Scholes model and CRR binomial model and the differences between the results of these two models are analyzed for investors to choose the appropriate model for option prices. From the practical calculation results, it is verified that the Black-Scholes model can give out the analytical solutions of option prices and decrease the calculation of solution, while it can only be used for European options with stock prices regarded as a continuous process. For the CRR binomial model, although it can only give numerical solutions and requires lots of calculation because of too many branches, but it can solve the American option prices with early exercises and the European option prices with stock prices regarded as a discrete process.

Peculiarities of accounting for transactions in derivative financial instruments are due to the risks inherent in such objects of accounting, in particular in terms of uncertainty about their fair value in the future. Improving the methods and forms of regulation of derivative financial instruments through the mechanisms of accounting methodology determine the need to find opportunities to improve the methodological and organizational principles of accounting in terms of valuation of derivatives, taking into account the practice of IFRS to achieve reliability of financial statements. Difficulties in reconciling UAS with IFRS on the valuation of derivative financial instruments (historical or fair value) are due to the application in regulations of different approaches to the formation of financial statements. It is proved that the use of the historical cost method for valuation of financial instruments is inappropriate, as their contractual nature is manifested in the ability to carry out indefinitely transactions that do not lead to cash settlements, but increase the financial risks of the enterprise. The application of the fair value method for the valuation of derivative financial instruments sets out special requirements for the organization of the valuation process of financial instruments in order to ensure the further choice of sources of financing and financial risk management. The list of elements of the accounting policy which should be provided in the administrative document on the accounting policy of the enterprise which cover methodical and organizational receptions of the account is defined. The classification of financial instruments is defined as the basis for the choice of accounting policy methods. The minimization of potential risks of losses due to the use of incorrect valuation of financial instruments should be facilitated by appropriate verification based on the comparison of valuation results based on independently obtained prices with the results provided as a result of valuation procedures. It is proved that the audit should cover liquid financial instruments, as well as those instruments that do not have market prices, which will facilitate further decisions on the adjustment of valuation models and methods.

The objective of this paper is to examine the effect of the use of the fair value model under IAS 40 of accounting for an investment property on the fundamental analysis of Barwa Company, a real estate developer company listed in Qatar Exchange. This examination of effect concentrates on whether or not this choice will have an impact on the fundamental financial analysis of the company and consequently on investors' decision-making. The research methodology depends on selecting balance sheet and income statement items that are affected by the adoption, then restating them by adjusting for the revaluation gain or loss recognized and comparing them to the original values. Profitability and financial market ratios are utilized to examine the impact on the accounting numbers. Ratios are calculated over 17 consecutive quarters from Q1-2007 to Q1-2011. The study finds that while the choice of the fair value model results in a small impact on balance sheet items, the effect on income statement items seemed to be significant. Among the accounting numbers affected, net income remains to have suffered the highest impact. Furthermore, all accounting ratios were affected by the choice. The ratios used are those of profitability and market value including profit margin ratio, the cost to income ratio, return on assets, return on equity, price/book value ratio and earnings per share. Interestingly, upward and downward market corrections for the company⁉s share price were not associated with the company's recognition of fair value revaluation gains or losses. This suggests that the share price of the company may not be driven by the company specific characteristics, rather by different market factors. The study contributes to the literature by examining the effect of the adoption of fair value rules in IFRS on the financial information as the study documents the direct effect of the use of the fair value model in IAS 40 on accounting figures in general and reported net profit or loss in particular. Moreover, looking at Fair Value Model (FVM) from the firm fundamental perspective is important for both standard setters and shareholders. For standard setters, the results of such inquiry help to verify whether the standard on fair value reached its goal of providing the capital markets with relevant and reliable accounting information that mitigates the information gap between the firm and outsiders. For shareholders, FVM is important from both investment and contracting reasons. From an investment perspective, IAS40 has an impact on the last line of the income statement, and shareholder decision on whether to buy, hold or sell, depends mostly on the informativeness of firm reported earnings. Second, FVM has an impact on the contractual arrangements with both managers and creditors.

Based on PP No. 71 Year 2010, to release a useful financial statement, there has to be good quality of information. The quality of the statement is reflected from its qualitative characteristic whih are relevant, reliable, comparable and comprehensive. The application of fair value and accrual basis is believed to be able to increase the quality of a financial statement because the calculation of fair value will influence the reliability and the relevanceof information in the financial statement and the accrual basis accounting that will create a valid, accurate, comprehensive and relevant financial statement. this research aims to iinvestigate the influence of the application of fair value and the accrual basis accounting toward the quality of local government's financial statement. The test instrument in this research is multiple linear regression analysis.To accomodate the research aim, the method used in this research is quantitative with a survey approach through questionaire as its medium of data collecting. The questionaire is distributed to authorized personnel in charge of compiling the local government's financial statement in Region IV West java.The research result shows that the application of the fair value and the accrual basis affect the quality of local government's financial statement.

In response to the recent growth in the use of derivative financial instruments, the Financial Accounting Standards Board (FASB) recently required all companies to make certain classifications and disclosures for such "complex" financial instruments. Yet, the Securities and Exchange Commission (SEC) and the FASB now demand even further reporting requirements - including requiring companies to recognize the "fair value" (and resultant gains and losses) of their financial derivatives as well as make other "qualitative disclosures" of the potential risk of holding such financial securities. The provisions of the current and proposed standards will affect significantly virtually all types of companies, especially those using derivative instruments. Hence, those preparing and evaluating financial statements under this emerging set of standards must comprehend these new provisions. The paper first discusses the current standards relating to financial derivatives and other financial instruments; it then provides examples of "leading" disclosures of such financial instruments. Then, based upon the responses to a mail questionnaire, the paper discusses how key groups view potential SEC changes in accounting for derivatives. All four of the groups generally agree with the provisions of SFAS No. 119 and most favor the recently passed, increased reporting standards.

Option is a contract that gives the right to individuals to buy (call options) or sell (put options) the underlying asset by a certain price for a certain date. One type of options that are traded is compound options. Compound option model is introduced by Robert Geske in 1979. Compound option is option on option. Compound option put on a call is put option where the underlying asset are call option. An empirical study using compound option put on a call stocks of Facebook. It has strike price compound option US$ 77.5 and strike price call option US$ 80, with the first exercise date on September 26, 2014 and the second exercise date on October 31, 2014. The theoritical price of compound option put on call on stocks of Facebook is US$ 75.65048. Keywords : Compound option, put on a call, option stocks of Facebook, Black-Scholes model, theoritical price.

In modern conditions a developed stock market is a necessary element of the country's economy effective functioning as it establishes legal and economic relations between businesses that need financial resources and individuals who can provide them. The level of business activity in this sector determines the state of economic development of the country. Exchange activity in a market economy requires government regulation in order to ensure the efficiency, balance and stability of the exchange market. The purpose of the article is to analyze the state regulation of the stock market in Ukraine. The article analyzes the dynamics of trading on the stock market of Ukraine, identifies problems with its operation. The main models of state regulation of the financial services market are considered, namely: monoregulatory and polyregulatory. It is concluded that there is a multi-regulatory model of organized markets in Ukraine, as regulatory functions are assigned to the National Commission on Securities and Stock Market and the National Bank of Ukraine on domestic government bonds, money market derivative contracts, money market instruments. The state regulation of the stock market in Ukraine in accordance with the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine on Simplification of Attracting Investments and Introduction of New Financial Instruments" of June 19, 2020 is studied. which includes capital markets and commodity markets; improving the organization of the depository and clearing system; introduction of a trade repository and a liquidation of the netting mechanism; enshrining in law the differences between qualified and unqualified investors; introduction of green bonds as a new type of financial instruments. It is concluded that the adoption of the above law is an important step in the development of the stock market, as this law amends the law "On Securities and Stock Market" and establishes uniform rules for all exchange traders, defines the market regulator and circulation mechanism. financial instruments, radically changes the structure of the capital market and adapts Ukrainian legislation to the norms of the European Union in the field of financial services, bringing Ukraine closer to the global financial space.

The valuation of mineral assets and equities is an extremely contentious issue. This thesis investigates the valuation of gold mining initial public offerings through the use of a binomial option pricing approach. The study provides mixed results. Although statistical results indicate the binomial option pricing model is an effective equity valuation technique, an analysis of the estimation errors that arise by comparing the binomial equity value to the market equity value indicates the opposite. This analysis does, however, provide interesting insights into the validity of the model and the circumstances in which the application of the model will be most appropriate. In addition to the contribution made to the academic literature, this thesis also makes a significant practical contribution. One investment professional estimates that real option pricing techniques will become a widely used valuation methodology within the next five years. This thesis is a significant step towards achieving this expectation.

The Effect of Reporting Model on Analyst Forecast Accuracy

Chapter 9 - Option pricing

Price dispersion and vanilla options in a financial market game

Pursuant to the provisions in Accounting Standard for Business Enterprises No. 3 - Investment Property (CAS3) issued on February 27, 2006 by the Ministry of Finance, China’s investment real estate follow-up measurement method can choose the cost model or the fair value model. But after investigation we found that, currently, only less than 5% of the enterprises with investment real estate projects in Shanghai and Shenzhen used a fair value model in the follow-up measurement. Therefore, in view of this phenomenon, this paper analyzes the factors influencing the fair value measurement model of investment real estate.

Financial instruments pose a number of problems in economic sciences, especially in accountancy which deals with continuous measurements of these instruments in practice. One of the major problems is the use of fair value is valuating financial instruments. According to this category, two basic financial instruments ca be identified – instruments whose prices are determined by active markets and those for which such prices and markets do not exist. The first class is valuated on the basis of accounting categories while the second type of instruments is valuated on the basis of value estimation models and techniques. The paper presents the models for balance sheet valuation of shares based on fair value in active markets estimated on the basis of economic and financial models. The paper aims to present the results of empirical research and a comparison, on the basis of statistical methods, of valuations based on the actual fair value and estimated share values determined by economic and financial methods.

Cross-sectional tests of deterministic volatility functions