When Alex Holsenbeck was given the challenge
figure out how many options would be exercised by Embarq insiders in
the future he began to panic. But then he realized that he probably
had learned everything he needed in DAO. After dusting off the
cobwebs, Alex used regression as the back bone for a Crystal Ball
model that helped Embarq forecast the financial impact of future
insider options exercising.
The first step was to perform a regression based on historic
exercise rates vs. specific stock price reference points. Validating
the regression output with academic research on lag effects,
Holsenbeck found that 10-day lagged reference points were the most
robust. Exercise rates from the historical regression data were then
used as key inputs to the simulation model. The combination of
exercise rates and stock price paths that were simulated resulted in
a range of future option exercising.
Alex survived the thorough review from the Treasury group, and soon
the model was used throughout the finance department. The tax group
and cash flow statement guru were particularly heavy users, and Alex
knew that all the regression practice in class had paid off.