As part of a multibillion dollar transaction currently being negotiated, Dan was engaged to examine the optionality of long term contracts existing between the two parties and place a value on the contracts when viewing their terms as those of options.
The complexity of the options arose from the presence of strike price reset based upon an agreed upon formula, a floating strike price, and monthly exercise dates extending decades into the future. In addition the term of the option could vary depending upon the occurrence of certain external regulatory events beyond the control of either party.
Dan used the Cox-Ross-Rubenstein approach to address the problem thereby allowing for the discontinuities discussed above, the floating strike price, and an option term contingent on a regulatory event.
This solution design has allowed the client to perform pricing scenarios very quickly with the flexibility required given the indeterminate time horizon for the options.
Perhaps most importantly, Dan reduced the results of his work to a set of simple graphs which make his work intuitively accessible and understandable to those without a mathematical or finance background.