The Securities and Exchange Commission is cracking down on companies that use the Black-Scholes formula to value complicated warrants in an effort to get them to switch to more sophisticated methods.

The problem comes when companies rely on Black-Scholes to value warrants that can be exercised early or have provisions like a down round feature that protects investors in case the company goes out to raise additional funds, says Tony Alfonso, president of BDO Valuation Advisors.

As a closed-form valuation model, Black-Scholes takes into account only the stock price, the strike price and the instrument's term, and not additional complexities, Alfonso says. "Where the SEC has come out is cautioning folks that you cannot use Black-Scholes for that," he says. "You have to use an open-form model, either a lattice model, binomial, or a Monte Carlo simulation."

Complete your profile to continue reading and get FREE access to Treasury & Risk, part of your ALM digital membership.

  • Critical Treasury & Risk information including in-depth analysis of treasury and finance best practices, case studies with corporate innovators, informative newsletters, educational webcasts and videos, and resources from industry leaders.
  • Exclusive discounts on ALM and Treasury & Risk events.
  • Access to other award-winning ALM websites including and

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.

Susan Kelly

Susan Kelly is a business journalist who has written for Treasury & Risk, FierceCFO, Global Finance, Financial Week, Bridge News and The Bond Buyer.