Collars, Prepaid Forwards, and the DLOM: Volatility Is the Missing Link
The variable prepaid forward (VPF) model assumes that a marketability restriction only costs the asset owner the time value of money during the restriction period. It does not fit the definition of the marketability discount. A put-option model is better suited for the discount for lack of marketability (DLOM) calculation. The VPF model will usually significantly underestimate the DLOM, the more so the higher the asset's price volatility.
Contributor Notes
John D. Finnerty is managing director of AlixPartners LLP and professor of finance at Fordham University, 40 West 57th Street, 28th Floor, New York, New York 10019, USA. Phone: (212) 845-4090, Email: jfinnerty@alixpartners.com.
Rachael W. Park is vice president of AlixPartners LLP, 40 West 57th Street, 28th Floor, New York, New York 10019, USA.