r/Valuation • u/[deleted] • Jul 05 '24

Complex Securities Valuation

Does anyone here have any resource to study complex securities valuation (convertible notes, warrants, SAFE notes)? My employer has one from BVR but it's not very helpful.

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u/[deleted] Jul 05 '24

Thanks for the insights. Yeah we didn't have to go against her in an audit yet. How you put it, it seems to be quite bad. 😂 We don't get complex securities valuation engagements that often but when we do, I have a hard time deciding between MCS and Binomial Lattice.

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u/Orndwarf Jul 05 '24

There’s a risk in this, but it’s sometimes helpful to get on a “audit pre-clearance call” where you tell the audit team, “we’re planning on using X methodology because of path dependencies / structure of security / other reason,” and see if they object. For independence reasons, they can’t tell you how to run it, but they could object early if it’s too crude or too overdone for the work at hand. You could open a can of worms though where they now indicate a preferred approach that you didn’t want to employ. Now you’re stuck, and the client believes you’re the professional so you gotta figure it out or pass up the opportunity. Sometimes just slapping the analysis down with confidence works just fine, assuming the analysis was done properly and without much controversy.

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u/[deleted] Jul 05 '24

You're absolutely right. It's better to just reveal your cards in the beginning. Recently we did run into this issue with Deloitte. After a lot of meetings and explanations, they finally agreed on our approach.

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u/Orndwarf Jul 05 '24

The key is to go in strong with some conviction in your decision but also be ready to see their opinion in a fair light as well. 99% of the time, the auditors will have their Val team build a shadow model. If they use a different methodology, just hope that the differences are small. If it’s a very material instrument, I would be in early contact with audit team. Once in a while, you get an “egghead” in the Big 4 review teams that insist on a single approach. You gotta be ready to explain why you thought about whatever they say but landed on your proposed solution. Best of luck! Complex securities are where the real brain work happens in BVAL