Voglio sapere a riguardo di…

Federal Register / Vol. 86, No. 228 / Wednesday, December 1, 2021 / Rules and Regulations
lotter on DSK11XQN23PROD with RULES1

3. Similarity of the Exercise Prices The staff believes that when valuing an at-the-money share option, the implied volatility derived from ator near-the-money traded options generally would be most relevant.42 If, however, it is not possible to find ator near-themoney traded options, Company B
should select multiple traded options with an average exercise price close to the exercise price of the share option.43
4. Similarity of Length of Terms The staff believes that when valuing a share option with a given expected or contractual term, as applicable, the implied volatility derived from a traded option with a similar term would be the most relevant. However, if there are no traded options with maturities that are similar to the share options contractual or expected term, as applicable, then the staff believes Company B could consider traded options with a remaining maturity of six months or greater.44
However, when using traded options with a term of less than one year,45 the staff would expect the company to also consider other relevant information in estimating expected volatility. In general, the staff believes more reliance on the implied volatility derived from a traded option would be expected the closer the remaining term of the traded 42 Implied volatilities of options differ systematically over the moneyness of the option.
This pattern of implied volatilities across exercise prices is known as the volatility smile or volatility skew. Studies such as Implied Volatility by Stewart Mayhew, Financial Analysts Journal, JulyAugust 1995, as well as more recent studies, have found that implied volatilities based on near-the-money options do as well as sophisticated weighted implied volatilities in estimating expected volatility. In addition, the staff believes that because near-the-money options are generally more actively traded, they may provide a better basis for deriving implied volatility.
43 The staff believes a company could use a weighted-average implied volatility based on traded options that are either in-the-money or out-of-themoney. For example, if the share option has an exercise price of $52, but the only traded options available have exercise prices of $50 and $55, then the staff believes that it is appropriate to use a weighted average based on the implied volatilities from the two traded options; for this example, a 40% weight on the implied volatility calculated from the option with an exercise price of $55 and a 60% weight on the option with an exercise price of $50.
44 The staff believes it may also be appropriate to consider the entire term structure of volatility provided by traded options with a variety of remaining maturities. If a company considers the entire term structure in deriving implied volatility, the staff would expect a company to include some options in the term structure with a remaining maturity of six months or greater.
45 The staff believes the implied volatility derived from a traded option with a term of one year or greater would typically not be significantly different from the implied volatility that would be derived from a traded option with a significantly longer term.

VerDate Sep<11>2014

16:06 Nov 30, 2021

Jkt 256001

option is to the expected or contractual term, as applicable, of the share option.
5. Consideration of Material Nonpublic Information When a company is in possession of material non-public information, the staff believes that the related guidance in the interpretive response to Question 2 above would also be relevant in determining whether the implied volatility appropriately reflects a marketplace participants expectations of future volatility.
The staff believes Company Bs evaluation of the factors above should assist in determining whether the implied volatility appropriately reflects the markets expectations of future volatility and thus the extent of reliance that Company B reasonably places on the implied volatility.
Question 4: Are there situations in which it is acceptable for Company B to rely exclusively on either implied volatility or historical volatility in its estimate of expected volatility?
Interpretive Response: As stated above, FASB ASC Topic 718 does not specify a method of estimating expected volatility; rather, it provides a list of factors that should be considered and requires that an entitys estimate of expected volatility be reasonable and supportable.46 Many of the factors listed in FASB ASC Topic 718 are discussed in Questions 2 and 3 above. The objective of estimating volatility, as stated in FASB ASC Topic 718, is to ascertain the assumption about expected volatility that marketplace participants would likely use in determining an exchange price for an option.47 The staff believes that a company, after considering the factors listed in FASB
ASC Topic 718, could, in certain situations, reasonably conclude that exclusive reliance on either historical or implied volatility would provide an estimate of expected volatility that meets this stated objective.
The staff would not object to Company B placing exclusive reliance on implied volatility when the following factors are present, as long as the methodology is consistently applied:
Company B utilizes a valuation model that is based upon a constant volatility assumption to value its share options; 48
46 FASB ASC paragraphs 718105536 through 718105537.
47 FASB ASC paragraph 718105535.
48 FASB ASC paragraphs 718105518 and 718
105539 discuss the incorporation of a range of expected volatilities into option pricing models.
The staff believes that a company that utilizes an option pricing model that incorporates a range of expected volatilities over the options contractual term should consider the factors listed in FASB

PO 00000

Frm 00013

Fmt 4700

Sfmt 4700

68117

The implied volatility is derived from options that are actively traded;
The market prices trades or quotes of both the traded options and underlying shares are measured at a similar point in time to each other and on a date reasonably close to the fair value measurement date of the share options;
The traded options have exercise prices that are both a near-the-money and b close to the exercise price of the share options; 49
The remaining maturities of the traded options on which the estimate is based are at least one year, and Material nonpublic information that would be considered in a marketplace participants expectation of future volatility does not exist.
The staff would not object to Company B placing exclusive reliance on historical volatility when the following factors are present, so long as the methodology is consistently applied:
Company B has no reason to believe that its future volatility over the expected or contractual term, as applicable, is likely to differ from its past; 50
The computation of historical volatility uses a simple average calculation method;
A sequential period of historical data at least equal to the expected or contractual term of the share option, as applicable, is used; and A reasonably sufficient number of price observations are used, measured at a consistent point throughout the applicable historical period.51
Question 5: What disclosures would the staff expect Company B to include in its financial statements and MD&A
regarding its assumption of expected volatility?
Interpretive Response: FASB ASC
paragraph 71810502 prescribes the ASC Topic 718, and those discussed in the Interpretive Responses to Questions 2 and 3 above, to determine the extent of its reliance including exclusive reliance on the derived implied volatility.
49 When near-the-money options are not available, the staff believes the use of a weightedaverage approach, as noted previously, may be appropriate.
50 See FASB ASC paragraph 718105538. A
change in a companys business model that results in a material alteration to the companys risk profile is an example of a circumstance in which the companys future volatility would be expected to differ from its historical volatility. Other examples may include, but are not limited to, the introduction of a new product that is central to a companys business model or the receipt of U.S.
Food and Drug Administration approval for the sale of a new prescription drug.
51 If the expected or contractual term, as applicable, of the employee share option is less than three years, the staff believes monthly price observations would not provide a sufficient amount of data.

E:FRFM01DER1.SGM

01DER1