CSC26 BV - No-Arbitrage Arguments and the Link Between OPM and Yield Approach

Session Description

The recently issued working draft of the Valuation of Privately-Held-Company Equity Securities Issued as Compensation discusses alternatives to valuing liquidation preferences within a traditional OPM framework. As suggested in the guide, it is important to assess whether the results make sense in terms of the relative value and implied yields of the securities in the capital structure. We demonstrate that there is a direct link between no-butterfly arbitrage conditions for options and increasing yields for liquidation preferences. We look at example where the results are inconsistent and indicate where the no-butterfly arbitrage and increasing yields conditions are violated. Next, we investigate hidden arbitrage cases which would not be readily apparent. Finally, we discuss how these findings could be the basis for considering a more general approach which can potentially address these concerns within the context of an OPM framework (albeit with relaxed volatility assumptions).

Speakers

Amir Alerasoul| Managing Director | Valuation Research Corporation
Pablo Alfaro | Senior Vice President | Valuation Research Corporation

Continuing Education

Review of this session recording will award 1.2 CE hour(s). 

CPE credit is not awarded for this pre-recorded offering.