Product-specific Q&A

1. What is included in the Volatility Tool?

2. How can I purchase the Tool?

3. How do I Install the Tool?

4. How does it compute stock pricing volatility?

5. How did you verify that your calculations are correct?

6. How do I import the historical stock pricing data?

7. Can the model compute volatility for periods shorter than one year?

8. What is the initial cost? Are there any additional costs?

9. Can multiple people use the product concurrently?

10. Can I share your templates?

ASC 718 (formerly FAS123 & FAS123r) Q&A

11. Why do I need to compute historical volatility?

12. What if I am not using Black-Scholes or Lattice Models to value my Options?

Tool Requirements Q&A

13. What do I need to use the Tool?

14. What if I need additional help?

15. How do I install the Tool?

Tool Edition Differences and Q&A

16. What is the difference between the Standard and Advanced Editions?

17. Who would need the Advanced Edition?

Product-specific Q&A

1. What is included in the Volatility Tool?

The Volatility Tool includes a rich Excel template with software to prevent user error and complete documentation. The Tool uses a mathematical formula to compare stock pricing action over annual periods to find the aggregate change in stock percentage (using a logarithm) and normalizing the changes over the trading days. See Item 4 below for more details. The Tool also includes extensive documentation.

There are two versions: the Standard Edition which computes calendar year volatility and the Advanced Edition which computes volatility from user-specified dates. The Advanced Edition can also annualize partial year data (not available on the Standard Edition).

2. How can I purchase the model?

The model is purchased from our website using PayPal and is available for immediate download. We're sorry but once you have downloaded the file, refunds will not be possible.

3. How do I Install the model?

We provide two installation methods: Windows Installer and Self-Extracting Zip file. If you have Windows XP or later, we recommend using the Windows Installer option (you can also install the Microsoft Installer software on Windows 2000 and NT 4.0 platforms).

The Self-Extracting Zip file is an executable that can be run on any Windows platform. You simply run the executable the same as any executable (.EXE file) from Window Explorer and the Zip file will prompt you to select a directory to install ('Extract To:'). You press the 'Start' button and files and directories are simply copied to the directory you select.

After installation on either method, a directory is created that contains the template file and documentation. Simply read the documentation PDF and you are ready to use the model.

Our Tool requires Microsoft® Office XP (or Excel 2002) or later and can run on any Windows-based computer certified for use with the Office software. We recommend that you have at least 100MB of available disk space to store volatility computations and backup data.

You may install the model on a server or multiple PC's/laptops but the model is only licensed for a single grantor (legal entity or company). Bulk licensing is available for CPA and Consulting firms. Contact sales@procognis.com for details.

4. How does it compute stock pricing volatility?

The Volatility Tool takes up to 20 years of historical stock pricing data and computes an annual volatility based upon daily stock price changes. The stock price used in the computation is adjusted for splits, dividends and other unusual events (as derived from Yahoo!® Finance historical stock data closing adjusted price column). The mathematical description of the methods used are detailed in the included documentation. The following is a summarized description of the methods employed.

The daily price changes are divided against the prior trading day's price and the logarithm is summed and divided by the number of trading days in the annual period to compute an average price fluctuation.

This average fluctuation is then subtracted from the same daily logarithm division and the sum of the squared differences is computed. The square-root of the is sum of the square differences (sometimes called the Root-Mean-Square or RMS) is then used to find the aggregate annual volatility.

The logarithm division and Root-Mean-Square methods are used to compare percentage stock price differences (instead of dollar differences) and we feel that this is a much more sophisticated method to find price fluctuation. Methods that use the simple average stock price over the year will tend to produce inaccurate volatility measurements.

Note that the PCAOB has recently issued a Q&A (dated October 17, 2006) indicating that companies using Historical Volatility methods should meet the following criteria (paraphrasing from the PCAOB release):

1. The Company has no reason to believe that future volatility over the expected/contractual term (as applicable) is likely to differ from its past,
2. The computation of historical volatility uses a simple average calculation method,
3. A sequential period of historical data at least equal to the expected/contractual term of the share option (as applicable) is used and,
4. A reasonably sufficient number of price observations are used, measured at a consistent point throughout the applicable historical period.

Our Volatility Tool meets each of these criteria. The Tool can be used by both companies and audit firms to verify the Volatility input used for ASC 718 (formerly FAS123r).

5. How did you verify that your calculations are correct?

The Volatility Tool uses well-known formula to compute volatility (the exact formula is detailed in the documentation provided with the product in the Appendix). The output was tested against numerous companies' historical volatility and produced the expected volatility numbers. We have further tested our model using actual inputs from our customers and found the results to match expected values.

6. How do I import the historical stock pricing data?

Yahoo!® Finance historical stock data provides a freely available source for stock prices over user-selected periods of time. Free access to this data alongside this powerful Volatility Tool makes historical volatility calculations straightforward.

Simply go to the Yahoo!® Finance website and click the Historical Prices link under the Quotes heading. Enter your stock symbol and date range and click the 'GO' button. There is a link on the bottom of the output page that allows you to download the file to a spreadsheet format (a CSV file). Simply click this link and save the file on a local drive. It's that easy. Once this file is saved locally, you can run the Volatility and re-compute volatility at any time.

7. Can the model compute volatility for periods shorter than one year?

The Volatility Tool uses the data provided in the input file to determine the actual trading prices (closing adjusted price) to determine volatility. So, any amount of daily trading price action will create a sample to compute volatility. The volatility computation simply derives the percentage change based on the formula. You can use the Tool to compute monthly, bi-annual, short trading year or any other period's volatility. Of course, more data points will produce a more significant outcome.

8. What is the initial cost? Are there any additional costs?

The Standard Edition product is $349 (US Dollars). The Advanced Edition product is $599. You purchase by online payment with PayPal. The difference between the two editions are found below.

The license is per Company or legal entity that grants stock-based contracts (option 'grantor'). CPA firms, consulting firms or other entities that have business relationships with companies that issue stock options and that wish to use our products for their customers will need to purchase a license for each grantor. Please contact our sales team for more details and pricing for license packs or bulk licenses.

There are no ongoing maintenance costs. Once you have purchased the Tool, you own the license for it. Ongoing technical support services are on a per-incident basis with no support contract required.

We're sorry but returns cannot be accepted after the transaction has been completed.

9. Can multiple people use the product concurrently?

Yes. Any data created with our software can be accessed or created by anyone with access to the software. However, the license is for one company and grantor so any use within the license is permitted.

You may install the model on a server or multiple PC's/laptops but the model is only licensed for a single legal entity or company (grantor)..

10. Can I share your templates?

No. Our templates are proprietary. By purchasing the Tool, you have been granted a license to use them for one company and grantor. If you have multiple subsidiaries, each must purchase a separate license.

ASC 718 (formerly FAS123 & FAS123r) Q&A

11. Why do I need to compute historical volatility?

Volatility is used by stock valuation models to provide a means to estimate stock price movement over the period the model can expect the option holder to exercise his or her stock. Without the volatility input, the model has no means to determine stock behavior into the future and thus it cannot produce a valid potential stock option valuation.

Higher computed volatility will tend to produce higher stock option valuations since the option has a greater likelihood of increasing in price and thus the option can be expected to be worth more than an option on a stock with lower volatility. Given this relationship, accurate volatility estimations will greatly affect the overall stock option valuation generated by any valuation model.

12. What if I am not using Black-Scholes or Lattice Models to value my Options?

If you are using a stock model not specifically endorsed for our Volatility Tool (i.e. Black-Scholes-Merton or a Lattice model), you may still be able to use the Tool. However, depending on the volatility input requirements of the model you are using, some modifications or re-interpretations may be necessary. We can provide Professional Services expertise to guide you in using this Tool and in gathering and supporting your conclusions. Please contact our Consulting group for information.

Tool Requirements Q&A

13. What do I need to use the Tool?

The Volatility Tool is based on an Excel template using embedded code. You will need Excel 10.0 or greater (Office XP or greater). You will also need to set Medium Macro security to allow Macros to run on each workstation. Disk space required will depend on the number of grants saved on the system. Each grant will require approximately 200KB and the base installation will require about 1MB.

14. What if I need additional help?

Technical support is available via email on a per-incident basis. If encounter technical issues, simply email us at support@procognis.com. We will make every effort to resolve your technical issues.

15. How do I install the Tool?

Simply run the Installer file or the Executable you downloaded following the PayPal transaction. The installation software will ask you where you would like to install the files on your hard drive or network. Both applications default to installing the software in the current directory (where you saved the installation file). After installation is complete, a shortcut will be created on your desktop that will link to the working template file.

For the Windows Installer version, should you want to delete the installation, you should use the Add/Remove programs feature in the Control Panel or simply use the Remove option when re-running the installer.

Tool Edition Differences and Q&A

16. What is the difference between the Standard and Advanced Editions?

The Standard Edition is our basic model and computes volatility on a calendar basis. This means that all trading information is parceled into January to December annual intervals. The data used in the computation is the full data set imported from Yahoo! Finance and there is no ability to select sub-dates.

The Advanced Edition provides the same calendar computation as the Standard Edition but adds the ability to select dates to limit the date range and to annualize the partial period. Additionally, the Advanced Edition uses the user-entered dates to define the year range so that the volatility calculation is not limited to a calendar year. These features are very useful to adjust the volatility computation to use selected dates and annualize the partial year.

17. Who would need the Advanced Edition?

The Advanced Edition is more flexible and is recommended for all users. It is most useful for customers who need to compute volatility in periods that extend past a calendar year (January 1 to December 31). You may be required to compute volatility for the expected life of the option using the grant date as a starting point and this expected life will likely include a fractional period and will probably not align to the start of a calendar year. In this case, the Advanced Edition computes a volatility estimate conforming to the dates and period of the grant. More importantly, the Advanced Edition provides the ability to annualize the fractional year (the earliest year). The Advanced Edition can also compute the calendar volatility and so can be used for both calendar and variable date applications.