If your firm has gotten used to using the Black-Scholes Options Price Model (BSOPM) when valuing options and other derivatives, you may want to rethink your practice. The reason? The BSOPM may not be entirely accurate when pricing derivatives that are other than “plain vanilla,” says Anthony Alfonso, president of BDO Valuation Advisors in Los Angeles. Non-vanilla options are those with “dynamic features,” such as variable strike prices.

This isn’t just Alfonso’s opinion. In a November presentation, “SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers,” the SEC states, “Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives).” more

Avoidable.

As you may be aware, the Government’s Financial Crisis Inquiry Commission reported yesterday that the “Great Recession” of the last several years could have been avoided if it were not for financial institutions, investors, and regulators not complying with the law (or common sense).

Now, there are those who argue that all laws were complied with (after all, almost no one has gone to jail).

• If true, then why did the economy go into free fall for so long? (Maybe the rules were “bad”?)

• Perhaps the rules were good but no one noticed that they were being ignored until it was almost too late? (Asleep at the switch syndrome?)

• Once problems were detected, the solutions from our leaders exacerbated the problem? (Throw the rascals out.)

• All of the above. (The perfect storm.) more

This has been one of those weeks that might make you glad you’re not a banker, or wish you weren’t if you are.

At Davos, French president Nicolas Sarkozy has re-ignited his campaign for a global tax on bank transactions and took time out to deliver a severe tongue-lashing to JPMorgan Chase CEO Jamie Dimon, who’s not too enthused about Sarkozy’s proposal, for some reason. more

Now that Oscars season is upon us (and now that chief risk officers finally have their day in the Hollywood spotlight, thanks to ERM guru Demi Moore), it’s time to unveil the award nominees for the 2011 Financial Crisis Inquiry Commission Report.

The report, released this week, is a doozy: lengthy, detailed, contentious (commissioners who dissented with the report published their reasons why), and engaging. The 14-page conclusions section marks a good place to begin if you can’t devote hours to reading through all 662 pages.

This report calls to mind the 9/11 Commission Report in its tone and scope (which in no way suggests that I’m comparing the loss of $11 trillion in U.S. household wealth to the loss of lives on Sept. 11, 2001). That said, I think this narrative qualifies as required reading for all finance and risk professionals in all industries.

The following awards highlight some of the most compelling findings, insights, and sentences in the portions of the report I have read so far (Conclusions, Dissenting Views, Part I, and Part V):

Best Pull Quote: “In this instance, too big to fail meant too big to manage.”

Worst Compensation Strategy: Compensation systems — designed in an environment of cheap money, intense competition, and light regulation — too often rewarded the quick deal, the short-term gain — without proper consideration of long-term consequences. Often, those systems encouraged the big bet — where the payoff on the upside could be huge and the downside limited. This was the case up and down the line — from the corporate boardroom to the mortgage broker on the street. more

As I mentioned in my previous post, I am happy to see the President so eager to attack Dumb Stuff. I am, too.

President Obama’s column on his regulatory review contained several points that double as guidance for business executives and managers reviewing their annual budgeting process for signs of intelligence:

Root out processes “that are not worth the cost”: The Hackett Group reports that organizations spend 25,000 person days per $1 billion of revenue on their budgeting process. That’s a lot of people — and a lot of cost. Big chunks of that time are spent negotiating goals and arguing over assumptions. Budgeting can take 3 to 6 months to negotiate and gain the necessary approvals.

Is it worth the cost? more