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Technical Appendix C: Estimating Volatility Volatility is the standard deviation of the logarithmic percentage change in the underlying. Volatility is formally equivalent to the statistical measure called standard deviation, which reflects the deviations of a variable from its mean and is roughly equivalent to the average squared deviation from the mean. Under the assumption of a normal distribution, one would expect values to fall within plus or minus one standard deviation of the average 68% of the time, plus or minus two standard deviations of the average 95% of the time, and plus or minus three standard deviations of the average 99% of the time. The standard assumptions about the statistical properties of exchange rates that enable us to estimate the probability require that we measure the volatility of logarithmic changes. For example, on October 4 , 1999 the deutschmarlc was at 1.825 1. The next day it was at 1.8296. The percentage change is about 0.246562%. close for small changes but will differ more with larger changes. The volatility used in the calculation of the probability of profit should be the investor's best estimate of the true volatility as of the day the transaction is initiated. It is not possible to precisely determine what this estimate would b e Option pricing theory suggests using the volatility implied from option transactions. This measure, called The logarithmic percentage change is ln(1.00246562) = 0.246258%. These numbers will be
implied volrrtiliry, requires an actively traded market for the options and a data base that
provides either the option prices or the implied volatility. Unfortunately, these requirements are not met here. The exchange-listed currency options market in the U. S. is not a very active market. Most currency option trades occur in the OTC market, where prices and implied volatilities are not captured and published in easily accessible data bases. Therefore, I use the historical volatility, a measure of the volatility over a recent time period. When using historical volatility, one must decide how far back to go when collecting data for this estimate. Common periods are 30, 60, and 90 days but others could be used. I have chosen to use all three periods and, therefore, I will give a range of answers. The issues in this case do not hinge on precise estimates of the probabilities but only on reasonable estimates.
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Technical Appendix D: Valuation of Digital Currency Options As described in Teclmical Appendix A, six variables are required in the valuation of a currency option:
S = cunent exchange rate
X = exercise price
rd = risk-free
rate in the domestic currency
rf= risk-free rate in the foreign currency
(3
= (Greek
"sigma") the volatility ofthe underlying
T = the time to expiration (days to expiration divided by 365)
These values are inserted into the Black-Scholes-Merton model to obtain the value of a standard European cunency option. As noted in the body of this report, a digital option is a component of a standard option. Let the payoff if the option expires in-the-money be P. The formulas for the values of digital calls and puts Scholes-Merton: c, = Pe-'"'N(d2)
p, = pe-'"'N(-d2) where
CD
and p ~are as follows, which is adapted from Black,
d2=
h ( ~ e - ' ' ~I X ) + (r, - (cr2 l2))T
ffJF
This formula assumes that the spot exchange rate, exercise price, and digital payoff are all in units of the domestic currency. That is the case with some of the transactions in this case but not with others. Recall that some of the digitals have the exercise price expressed in units of foreign cunency, while the payoff is in units of domestic currency. To understand how to adapt the formula, consider the terms on the right-hand side of the above formulas for c~ a n d p ~ . They are as follows:
P = payoff
e-';'' = present value factor, which discounts the payoff P from expiration to the current time N(d,) = risk-neutral probabilty of the call expiring in-the-money N(-d!) = risk-neutral probabilty of the put expiring in-the-money
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Thus, P-" is the present value of the payoff. It is then multiplied by a probability C'' figure, which differs depending on whether the option is a put or a call. These probability figures are not the actual probabilities of the options expiring in-the-money. They are called risk-neutral probabilities and are measures that assure us that the options are priced correctly and permit no one to earn a risk-free profit that exceeds the return on a risk-free security. Thus, we need the risk-neutral probability of the option expiring in-the-money. If the exchange rate and exercise price are expressed in units of foreign currency, we need the risk-neutral probability of the option expiring in-the-money when viewed from the perspective of the foreign investor. Thus, we simply input the exchange rate and exercise rate in units of foreign currency. In the above formula for 4 , we enter the foreign rate where the domestic rate is required and the domestic rate where the foreign rate is required. The volatility and time are the same. Then N(d?) or N(-dz) gives us the correct risk-neutral probability for a call or a put, when viewed from the foreign perspective. We then multiply the appropriate probability by the present value of the payoff' in dollars.
I will illustrate with a hypothetical transaction similar to the ones in this case.
Consider an American investor who buys a one-year digital call option on the Canadian dollar (CAD). The spot rate in dollars is $0.90 and the exercise price on the call is $0.95. The option pays off $5 if it expires in-the-money. Thus, if the exchange rate is above $0.95 after one year, the American investor receives $5 from the counterparty. This approach is the standard or direct convention, because the option exercise price is in dollars. Approaching the problem from this angle would imply that the U. S. risk-free interest rate would be the domestic rate and the Canadian lisk-free interest rate would be
the foreign rate. The standard deviation would reflect the volatility of the CAD exchange
rate expressed in terms of dollars per CAD. Let us assume the U. S. interest rate is 3%, the Canadian interest rate is 4%, and the volatility is 10%. Using the Excel function "=normsdist()" to calculate the normal probability, these inputs go into the model in the following manner:
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Now, let us create another option that has been constructed in a different currency, a digital put on the British pound. The spot exchange rate is 50.57, the exercise rate is 50.55, the volatility is 8%, the LJ. S. interest rate is 3%, the British interest rate is 5%, the option expires in one year, and it pays $3. Note that the strike is expressed in pounds hut the payoff is in dollars. Thus, we find the probability from the perspective of the British investor and multiply it by the present value of the payoff from the S. perspective of the U. investor. The process is as follows:
d2 =
ln(~e-''' I X ) + ; - (a' 12))T ( , cr
JT
Note that in the formula for 4, the US rate plays the role of the foreign rate and the British rate plays the role of the domestic rate. This interchange is required because we are entering the exchange rate and exercise price in foreign terms. N(-dz) gives us the risk-neutral probability of the put expiring in-the-money. Note, though, that this probability is multiplied by the present value of $3 in one year, where the discounting is done using the U. S. rate. The U. S. rate is used because the investor receives $3 in one year if the option expires in-the-money. We need to know what that $3 is worth now in dollars to complete the valuation of the option. Thus, the $3 in one year is worth $3e.03(')
= $2.91.
Multiplying by the probability N(-dz), we get the option value of $0.7446
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Thus, to summarize, for options in which the strike is denominated in dollars, use the standard approach where the U S rate is the domestic rate and the foreign rate is the foreign rate The result will be the option value in dollars. For options in which the strike is denominated in the foreign currency, do the following: Step 1: LJse the U S interest rate as the foreign rate and the foreign interest rate as the domestic rate, expIess the current spot rate in terms of foreign cunency per dollar, and the exercise rate in terms of foreign currency per dollar Then calculate dl Step 2: Given dz from Step 1 , use Excel to calculate N(d2)for calls and N ( - 6 ) for puts using Excel. Step 3: Calculate the present value of P by multiplying by rate is now the domestic rate. Step 4: Multiply the present value of P from Step 3 by N(d2) for calls and N(-d2) for puts To use an interest rate in an option pricing model, we require that the rate be input in continuously compounded form. The interest rates obtained are in LIBOR format, as discussed in the main body of this report. The conversion of LIBOR rates to continuously compounded equivalents is done in the following manner:
e-
where the U. S.
where L is LIBOR, m is the number of days of the option's life, and In(.) is the natural logarithm function.
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Supporting Appendix A: Curriculum Vita Don M. C h a n c e William H. Wright, Jr. Endowed C h a i r f o r Financial Services Office Address Department of Finance 2163 CEBA E. J. Ourso College of Business Louisiana State University Baton Rouge, LA 70803-6308 225-578-0372,225-578-6366 (fax) Home Address 833 Grand Lakes Drive Baton Rouge, LA 708 10 225-763-6343 (home) 225-803-6904 (cell)
Education a n d Certification Institute of Chartered Financial Analysts, Charlottesville, Virginia CFA, 1986 Louisiana State University, Baton Rouge, Louisiana Ph D , 1980 Major: Finance; Minor: Quantitative Methods M B A , 1973 University of Mississippi, Oxford, Mississippi University of Montevallo, Montevallo, Alabama B S , 1972 Major: Business Administration; Minor: Economics Professional Experience 2003Louisiana State University Professor and William 13. Wright, Jr. Endowed Chair for Financial Services, 20031980-2003 Virginia Tech, Blacksburg, Virginia First Union Professor of Financial Risk Management, 1996-2003. Professor of Finance, 1989-1996 Associate Professor of Finance, 1983-1989 Assistant Professor of Finance, 1980-1983 Virginia Tech Northern Virginia Graduate Center, Falls Church, Virginia 1999 (fall) University of North Carolina, Chapel Hill, North Carolina 1994 (fall) Visiting Scholar Louisiana State University, Baton Rouge, Louisiana 1978-1980 Graduate Teaching Assistant First National Bank of Birmingham, Birmingham, Alabama. 1973-1977 Last position: Assistant Cashier and Corporate Services Manager. Jefferson State .Junior College, Birmingham, Alabama 1975 Part-time Instructor
- Professional Activities d u r i n g Previous 10 Y e a r s Published a n d Forthcoming Articles Scholarly Articles "Taxation without Replication: A Look at a Problem in Synthetic Indexing." The Journal of Portfolio Management (forthcoming, 2007).
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"Black-Scholes-Merton, Liquidity, and the Valuation of Executive Stock Options " Advances in Financial Economics (forthcoming, 2007). Co-author: T -H Yang "Reply to 'A Hedging Deficiency in Eurodollar Futures." The Journal of Futures Markets 27 (2007), 195-20 1 "A Hedging Deficiency in Eurodollar Futures " The Journal of Futures Marlcets 26 (February, 2006), 189-207 "The Utility-Based Valuation and Cost of Executive Stock Options in a Binomial Framework: Issues and Methodologies." Jourual of Derivatives Accounting 9 (September, 2005), 165-188 Co-author: T.-H Yang "Mathematical Probability Theory and Finance: Connecting the Dots." Journal of Financial Education 3 1 (Summer 2005), 1-14 "Two Extensions for Fitting Discrete Time Term Structure Models with Normally Distributed Factors," Applied Mathematical Finance 18 (September, 2004), 187-205. Co-author: S. Agca. "Speed and Accuracy Comparison of Bivariate Normal Distribution Approximations for Option Pricing." The Jourual of Computational Finance 6 (Summer, 2003), 61-96. Co-author: S. Agca., "Swaptions and Options." The Journal of Risk 5 (Spring, 2003), 67-90 "The (1n)Stabilty of the Relationship Between Stocks, Bonds and Managed Futures." Journal of Applied Business Research 19 (2003), 75-93. "A Simple Proof of European Option Pricing with Discrete Stochastic Dividends." The Journal of Derivatives 9 (Spring, 2002), 39-45. Co-authors: R. I
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"Some Computational Problems in the Pedagogy of the Black-Scholes Model " The Journal of Financial Education 24 (Fall, 1998), 61-70. Co-author: H. E. Fredericlts "The Pricing of Equity Swaps and Swaptions " The Journal of Derivatives 5 (Summer, 1998), 19-31 Co-author: D Rich. "A Theory of the Value of Active Investment Management and Its Implications for Closed-End Funds and Investment Management Contracts." Advances in Financial Economics 3 (1997), 81-1 15, Practitioner Articles "Discretionary Trading and the Search for Alpha." (August, 2005), 117-135. T h e Journal of Asset Management 6
"Equity Swaps and Equity Investing," Journal of Alternative Investments 7 (Summer, 2004), 75-97. "Rethinking Implied Volatility." Financial Engineering News (January-February, 2003), 7, 20. "The New Science of Finance." American Scientist 87 (May-June, 1999), 256-263. Co-author: P. P. Peterson. Reprinted in Academic CommunitieslDisciplina~ Conventions by B Beedles and M Petracca Prentice-Mall: IJpper Saddle River, New Jersey (2001). "What Are Derivatives? A Comparison of Instrument Structures and Their Rislts for the Internal Audit Team." Chapter 2 in Derivatives and the Internal Auditor. London: Risk Publications (1999). "Price the Average." Energy and Power Risk Management 1 (December, 1996-January, 1997), 22-25. Co-author: D. Rich. "Guest Speaker: A Derivative Alternative as Executive Compensation." Financial Analysts Journal 53 (March-April, 1997), 6-8 Books An Introduction to Derivatives and Risk Management, 7"' ed. Mason, Ohio: Thomson SouthWestern (2007), 653 pp., co-authored with Robert Brooks; 6'" ed., Mason, Ohio: Thomson SouthWestern (2004), 675 pp ; 5'" ed., Fort Worth: Harcourt, Inc. (2001), 822 pp. [Previously published as An Introduction to Derivatives, 3'L'ed., Fort Worth: The Dryden Press (1995), 625 pp.; 4"' ed., (1998), 785 pp. Previously published as An Introduction to Options and Futures, Hinsdale, Illinois: The Dryden Press (1989), 560 pp; 2" edition (1992), 605 pp.] Solutions Review Manual: An Introduction to Derivatives and Risk Management, 7"' ed. Mason, Ohio: Thomson South-Western (2007), 126 pp., co-authored with Robert Brooks; Test Bank: An Introduction to Derivatives and Risk Management, 7'" ed. (2007), 94 pp, coauthored with Robert Brooks; Previous1 published as Instructor's Manual: An Introduction to Derivatives and Risk Management, 6" ed., Mason, Ohio: Thomson South-Western (2004), 229 pp.; 5'" ed., Fort Worth: Harcourf Inc. (2001), 242 pp; Previously published as Instructor's Manual: An Introduction to Derivatives, 3rd ed,, Fort Worth: The Dryden Press (1995), 252 pp. 4'" ed. (1998), 208 pp. [Previously published as Instructor's Manual: An Introduction to
7
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Options and Futures, Hinsdale, Illinois: The Dryden Press (1989), 200 pp; 2nded. (1992), 259 PP.] Analysis of Derivatives for the CFA Program. Charlottesville, Virginia: Investment Management and Research (September, 2003), 656 pp. Association for
Essays in Derivatives New York: John Wiley (1998), 323 pp. Collection of 70 essays on various topics in derivatives; various chapters reprinted in Financial Engineering News, (JanuaryfFebruary 2005), pp. 21-22. See "Other Publications and Writings." 2" edition, forthcoming, 2007 Articles Contributed to Books a n d Collections Chapter 9, "Risk Management" (with Kenneth Grant and John R. Marsland). Managing Investment Portfolios: A Dynamic Process, 3rd. ed., edited by John Maginn and Donald L Tuttle, Charlottesville: CFA Institute (forthcoming, 2007)
A "Valuing Forward Contracts." The Professional Risk Manager's Handbook: Comprehensive Guide to Current Tl~eoryand Best Practices, ed. Carol Alexander and Elizabeth Sheedy. Professional Risk Managers International Association (PRIMA) (2004). http:llwww.pmia.~rflRM~HandbooWhandbookintrophp
O t h e r Publications a n d Writings Engineering News, Teaching Notes. "Option Prices and State Regular Columnist, Fii?a~?cial Prices," MarcldApril, 2003, pp. 8-10; "Convergence of the Binomial to the Black-Scholes Model," Mayllune, 2003, pp. 8-9, 12; "Linear Homogeneity, Euler's Rule, The Black-Scholes Model, and an Application to Forward Start Options," SeptemberIOctober, 2003, pp. 10-11; "Concepts of Discrete and Continuous Time Models," November/December, 2003, p p 15-16,22; "Default Risk as an Option," JanuaryfFebruary, 2004, pp. 15, 22; "The Local Expectations Hypothesis," MarchIApril, 2004, pp. 13, 17; "The Volatility Smile," May/.June, 2004, pp. 13, 1617, 19; "A Nontechnical Introduction to Brownian Motion," MarcIilApril, 2005, pp. 21-22; "No Arbitrage Models of the Term Structure: Ho-Lee and Heatli-Jarrow-Morton," MayIJune, 2005,. pp. 21-22; "The Strange Relationship Between Academics and Practitioners in Derivatives and Risk Management," .JulylAugust 2005, pp 19, 22; "Risk Neutral Pricing of Derivatives," SeptemberIOctober 2005, p p 25-26; Regular Columnist, Fiirancinl Eizgiizeering News, Technical Notes. "A Generalization of the Cost of Carry Fonvardffutures Pricing Model. Part One " MarchIApril 2006, pp. 33-34; "A Generalization of the Cost of Cany FonvardlFutures Pricing Model. Part Two." MayIJune 2006, pp. 23-24, 26; ''The Pricing and Interest Rate Sensitivity of Floating-Rate Securities," SeptemberIOctober, 2006, pp. 17, 35-36, 38; "The Bivariate Normal Probability Density," NovemberIDecember, pp. 3 1,42. C u r r e n t Research Working Papers "Microsoft's Employee Option Buyback." "A Synthesis of Binomial Option Pricing Models for Lognormally Distributed Assets." "Pricing an Option on a Non-Decreasing Asset Value: An Application to Movie Revenue," with J. Hilliard and E. Hillebrand.
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"Private Information and the Exercise of Executive Stock Options," with R Broolcs and B Cline. "Stock Options, Incentives, and Shareholder Wealth: Problems and a Solution," with T-H, Yang. "Executive Stock Option Exercise, Insider Trading, and Abnormal Returns: Characteristics," with R Brooks and B Cline Firm
Resem,ch in Pr0gres.s "Dividend Rights."
"Dividend-Protected Options." Monographs Expensing Executive Stock Options: Sorting Out the Issues. Charlottesville: CFA Institute Centre for Financial Market Integrity (forthcoming, 2007). Co-author: R. T. McEnally. Real Options and Investment Valuation. Charlottesville: Association for Investment Management and Research (2002), 114 pp. Co-author: P. Peterson. Abstracted in The CFA Digest 32 (August, 2002), pp. 40-43 Instructional Cases State of Wisconsin Investment Board. International Thomson Publishing CaseNet (1998); 11ttp://casenet,thomson,com/casenet/abstr.acts/swib.htm1 Presentations a n d Participation in Conferences a n d P r o g r a m s Presentations at faczily seminars Korea Advanced Institute for Science and Technology (September 2006), George Washington University (April 2006), Virginia Tech (April 2006), University of Lava1 (October 2005), University of Massachusetts-Amherst (September 2005), Auburn University (March 2005), University of Southern Mississippi (April 2004), Rutgers University-Camden (February 2004), University of Mississippi (November 2002), Louisiana State University (May 2002, April 2005), University of Georgia (December 2001), Oklahoma State University (February 2000), University of Strathclyde (May 1999), University of Utah (May 1998), University of Vienna (April 1998), Virginia Tech Department of Mathematics (November 1997), University of New Mexico (May 1997) Presentatiolis at Regulatory Agencies Commodity Futures Trading Commission (Washington, October 1999) Presentations at Acadenzic Conferences Hofstra University Conference on Managing Risk in Financial Institutions (Hempstead, NY, April 2006), FDIC/CornelliHouston Derivatives Securities Conference (Arlington, VA, April 2006), Northern Finance Association (Vancouver, October 2005), Portuguese Finance Network (Lisbon, July 2004), Washington Area Finance Association (Washington, November, 2002; April 1999), Western Finance Association (Santa Monica, June 1999), International Association of Financial Engineers (September 1998), Financial Management Association (Copenhagen, .June 2002) Other Academic Conference Participation Advances in Econometrics: The Econometrics of Risk Management Conference, panelist, Baton Rouge, Louisiana (November 2006), Portuguese Finance Network,
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discussant (Lisbon, July 2004), Financial Management Association, panel moderator and organizer (San Antonio, October 2002), Washington Area Finance Association, discussant (December 1999), Financial Management Association, session chair (San Antonio, October 2002; Toronto, October 2001; Seattle, October 2000), Eastern Finance Association, discussant (Charleston, April 2001), Financial Management Association, discussant (Toronto, October 2001; Copenhagen, June 2002; San Antonio, October 2002); Denver, October 2003; New Orleans, October 2004; Chicago, October 2005; Salt Lake City, October 2006) Presentatior7.s at Practitioner Conferei7ces and Progranu Super Bowl of Indexing (Phoenix, AZ, December, 2006), The Art of Indexing (Washington, DC, September, 2006), Newport Cup of Indexing (Newport, RI, July, 2006), Risk-Management and Governance Conference, World Bank and Central Bank of' Brazil (Sao Paulo, Brazil, April 2006), CFA Society of New Orleans (New Orleans, February, 2006), Derivatives-Based Investments, (New York, December, 2005), The Seoul International Derivatives Securities Conference (Seoul, South Korea, August 2004; August 2005; August 2006), Society of Financial Examiners, New Orleans (August 2003), Asset Allocation Summit (Williamsburg, Virginia, April 2002), Canada Cup of Indexing and Related Products (Montreal, April 2002), AquilalUniversity of Missouri at Kansas City (Icansas City, March 20021, Society of Asset Allocators and Fund Timers (Atlanta, February 2002), Pro Bowl of Investment Risk Management (Lake Tahoe, April 2001), ICBI Risk Management Forum (Geneva, December 2000), Financial Analysts Seminar (Evanston, .July 2000), Pro Bowl of Derivatives Risk Management (Vail, March 2000), Association for Investment Management and Research (Chicago, March 2000), Scottish Institute for Research in lnvestment and Finance (May 1999), Association for Investment Management and Research (Chicago, November 1997) Participation in Practitioner Conferences Super Bowl of Indexing, panel moderator (Phoenix, AZ, December, 2006), Super Bowl of Indexing, panel moderator (Scottsdale, AZ, December, 2005), Derivatives-Based Investments, panelist (New York, December, 2005), Pro Bowl of Investment Risk Management, panelist (Lake Tahoe, April 2001), Pro Bowl of Investment Risk oanel moderator (Lake Tahoe.. A. r i 2001). Pro Bowl of Derivatives Risk ~ l Management.. . Management, panel moderator wail, March 2000), Association for Investment Management and Research conference on Derivatives in Equitv Portfolio Management, ~ programon the conference moderator (Chicago, March 2000), Virginia ~ e c h u n c h e o n Chicago Board of Trade vs the SEC, panel moderator (Washington, September 1999), Scottish institute for Research in Investment and Finance, panel moderator (Edinburgh, May 1999) Presentafions before Local and Co1i7mzmityGroups Southwest Virginia Chapter of the Institute of Management Accountants, Roanoke (April 2002), First National Student Portfolio Conference (Blacksburg, March 1998) Other conference,^ Attended The ABCs of Exchange-Traded and Over-the-counter Derivatives (New York, December, 2005), American Finance Association (San Diego, January 2004), Finance 2000, Boston University (April 2000), Chicago Board of Trade Research Seminar (December 1997)
-
Awards and Honors
MBA Distinguished L,ecturer, Korea Advanced Institute for Science and Technology, Seoul, 2006 AquilalLTniversity of Missouri at Kansas City Visiting Lecturer, 2002 University Certificate of Teaching Excellence, Virginia Tech, 1999 Distinguished Alumnus of the Year, University of Montevallo, 1999
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Pamplin College of Business Teaching Excellence Award, Spring, 1999
Research Grants, Financial Support, and Related
Chancellor's Distinguished Lectureship Series, 2004 Research Foundation of the Association for Investment Management and Research, 2000 VirginiaTech Center for the Study of Futures and Options Markets, 1997
Consulting
Meadows, Collier, Attorneys, 2005Catanzarite Law Corporation, 2000-2002,2006Bank of America & Davis, Polk, Wardwell, Attorneys, 2005-2006 CFA Institute, 2005 Council of Institutional Investors, 2005 Dickinson, Wright, Attorneys, 2004 Strobl, Cunningham, Sharp, Attorneys, 2004 Patpatia Associates, 2002 Epstein, Cole, Attorneys, 1999 DSTCatalyst, 1998 Association for Investment Management and Research, 2000
Executive and Professional Development Instruction
PRMIA and the World Bank, PRM Exam Review Course, May and October, 2006, Washington, D.C. Institute de Formation Bancaire de L.uxembourg (IFBL), 1999-2005. Derivatives Valuation and Analysis EATEL, 2004. Interest Rate Risk Management, Gonzalez, Louisiana Association for Investment Management and Research, "Valuing Executive Stock Options," webcast presentation with CD-ROM. Consultant to overall project entitled "Derivatives Analysis: Executive Stock Options and Short Sales Alternatives." 2004 AquilalUniversity of Missouri at Kansas City, 2002 Thomson Financial Corporation, 2000. Swaps: Applications and Pricing, Boston Frank J. Fabozzi Associates, 1999. Swaps: Applications and Pricing: Washington, D.C Frank .l.Fabozzi Associates, 1998. Introduction to Swaps, New York ICM Conferences, 1998, Equity Derivatives I, New York German Society of Financial Analysts, 1998-99. CFA review course in derivatives, Vienna, Austria Financial Analysts Review of the United States, 1997-2000. CFA review course taught in Raleigh, North Carolina, Bangkok, Thailand and Zurich, Switzerland (for Union Bank of Switzerland). Instruction in fixed-income securities, derivative securities and quantitative techniques
BOOB Reviews and Abstracts
Abstract of "An Empirical Comparison of Forward-Rate and Spot-Rate Models for Valuing Interest-Rate Options" (W Biihler, M. U Walter, T Weber) Contemporary Finance Digest (Winter 1999) Review of Black-Scholes and Beyond Option Pricing ModeLs (N Chriss), Risk (March 1997)
Academic Committees and Service
Director of Graduate Programs, Department of Finance, Virginia Tech, 1999-2003.
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Founder and Faculty Advisor, SEED (Student-managed Endowment for Educational Development), $3 5 million student-managed portfolio, 1997-2002 Doctoral Dissertation Research Committees Chaired T.-H. Yang (Louisiana State University) "Managerial Ability and the Valuation of Executive Stock Options." 2007 S. Agca (Virginia Tech) "The Performance of Alternative Interest Rate Risk Measures and Immunization Strategies Under Heath-Jarrow-Morton Framework " 2002. Article published in Journal of Financial and Quantitative Analysis. Placed at George Washington University D R. Rich (Virginia Tech) "Incorporating Default Risk into the Black-Scholes Model Using Stocliastic Barrier Option Pricing Theory " 1993 Article published in Review of Derivatives Research Placed at Northeastern University Professional Service .Journal of IndexesISuper Bowl of Indexing, 2005-2006 Judge for William F Sllarpe Indexing Achievement Awards Charlotte Chapter, PRMIA (Professional Risk Managers' International Association), Steering Committee, 2002-2003 Georgia State University Department of Finance External Review Committee (chair), 2002 New York Mercantile Exchange Institutional Money Management Advisory Committee, 19962000. Associate Editor, The Journal of Alternative Investments, 1998-2002, 2005; Journal of Derivatives Accounting, 2004-2006; The Financial Review, 1998-; The Journal of Derivatives, 1993-; Journal of Financial Engineering, 1997-1999 Editorial Advisory Board, Chicago Board of Trade Research Seminar Series, 1997-1998. Media Items Newspaper and other periodicals opinion/editorinl articles "Research and Teaching Go Hand in Hand," The Roanolce Times and World Nevvs, June 15, 2003, p. Horizon 3; "Lessons from the Corporate Confidence Crisis," The Virginian Pilot, August 20,2002, p. B9 Radio/Television In~erview,~ Appearances and WSLS Television, March 22, 2003; WFNR Radio, March 20, 2003; "At Issue," WBRA Public Television, November 24, 2002; WPSIUWFNR Radio, September 9-13, 2002; "At Issue," WBRA Public Television, July 28, 2002; Metro Radio Networlc, June 29, 2002; "The Money Club," CNBC, September 18, 1997 Miscellaneous Commentaries, Interviews, Presenlalions, Speeches and References Chicago Business, December 14,2006; The 2006 Indexing Almanac and Directory, December 2006; Hedge World, December 4, 2006; Greater Baton Rouge Business Report, November 21-December 4,2006; Bloomberg News, October 17,2006; Greater Baton Rouge Business Report, September 26-October 9,2006; Financial News (Seoul, Korea), August 31, 2006; Bloomberg News, July 3 1, 2006; The Daily Reveille, January 30, 2006; Risk, November, 2005; Financial News (Seoul, Republic of Korea), September I, 2005; Bloomberg News, August 30, 2005; Salon.com, October 11, 2004; Financial News (Seoul, Korea), August 24-25,2004; Fortune, May 3 1, 2004; Finaneial Engineering News, MarchIApril 2004; CFA Magazine, MarcWApril 2004; Greater Baton Rouge Business Report, January 22, 2004; Clearing Quarterly and Directory, Fall 2003; Roanolce Times and World News, May 25, 2003; Treasury and Rislc Management Express, November 4, 2002; Kiplinger's Personal Finance, November,
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2002; The Virginian Pilot, September 1, 2002; Fredericlcsburg Free Lance-Star, August 8, 2002; The Daily Record, February 21, 2002; CBS Radio, February 7, 2002; Forbes.com, February 7, 2002; SmartMoney.com, September 18, 2001; Best's Insurance News, May 25, 2001; Scrap Magazine, PvIarcb/April, 2001; San Francisco Chronicle, February 23, 2001; Office.com, February 2, 2001; Pensions and Investments, November 13, 2000; CBS MarketWatch.com, September 18, 2000; Derivatives Strategy, September, 2000; Office.com, March 16, 2000; InteractiveWeek.com, March 10, 2000; I
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Supporting Appendix B: Sworn Testimony in Previous Four Years
The Rogers Revocable Trust vs Bank of America, N A., Supreme Court of New York, New Yo~lc, New York, 2006
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Supporting Appendix C: Documents Reviewed
MUCOO0026 MUCOO0028
.
Foreign Exchange Option Foreign Exchange Option Foreign Exchange Option Foreign Exchange Option Foreign Exchange Option Foreign Exchange Option Foreign Exchange Option Option Foreign E~change Foreign E,xchange Option EIN Assignment
MUCOO0029 MUCOO0035 MUCOO0039 MUCOO0042 MUCOO0045 MUCOO0048 MUCOO005 I MUCOO0054 MUCOO0224 MUCOO0233 MUEY02258 MUEY02360 MUEY025 I4 MUEY02601 MUEY03587 MUM101541 MUPRO0521 MUPRO0523 MUPRO0524 MUPRO0739 MUPRO 1379 MUPRO 1382 MUPRO 1392
MUC00003 1 MIJC000037 MUCOO0041 MUCOO0044 MUCOO0047 MUCOO0050 MUCOO0053 MUCOO0056 MUCOO0225 MUCOO0234 MUEY02264 MUEY02366 MUFYO25 I5 MUEY02607 MUEY03589 MUM101604 MUPRO0521 MUPRO0523 MUPRO0524 MUPRO0808 MUPRO I38 1 MUPRO 1384 MUPRO I395
-
EIN Assignment
Limited Liability Company Agreement Limited Liability Company Agreement Assignment Agreement Limited Liability Company Agreement Assignment Agreement Opinion Certificate of Formation Certificate of Formation Certificate of Formation Opinion Certificate of Facts Certificate of Facts Certificate of Facts
P
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Supporting Appendix D: Compensation Arrangement
My services for the client of Meadows Collier are provided through the firm of RoundTable Group, Inc. I bill RoundTable Group $300 an hour.
Any results I present or conclusions I draw are not affected by my compensation.,
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270116_1.TXT 0001 1 IN THE UNITED STATES DISTRICT COURT 2 IN RE: * COBRA TAX SHELTERS * 3 LITIGATION * * 4 -----------------------* * 5 CARMEL PARTNERS, et al, * * 6 Plaintiffs, * * 7 VS. * NO.: 1:06 cv 8001 * (S.D. Ind.) 8 UNITED STATES, * * 9 Defendant. * ------------------------- * 10 * JS BUCKINGHAM * 11 INVESTMENTS, LLC, et al, * * 12 Plaintiffs, * * 13 Vs. * NO: 05-231 (Ct. Fed * Claims) 14 UNITED STATES, * * 15 Defendant. * -----------------------* 16 * MURFAM FARMS, LLC, * 17 * Plaintiff, * 18 * Vs. * NO: 06-245T through 19 * 06-247T (Ct. Fed USA, NO, * Claims.) 20 * DEFENDANT. * 21 22 23 24 25 0002 1 ******************************************************** 2 ORAL DEPOSITION OF 3 DON CHANCE 4 SEPTEMBER 6TH, 2007 5 ******************************************************* 6 ORAL DEPOSITION OF DON CHANCE, produced as a witness 7 at the instance of the DEFENDANT, and duly sworn, was 8 taken in the above-styled and numbered cause on the 2nd 9 of August, 2007, from 9:49 a.m. to 5:13 p.m., before 10 Tammy Staggs, CSR in and for the State of Texas, 11 reported by machine shorthand, at the law offices of 12 Meadows Collier, LLP, 901 Main Street, Suite 3700, 13 Dallas, Texas, pursuant to the Federal Rules of Civil 14 Procedure and the provisions stated on the record or 15 attached hereto. 16 17 Page 1
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270116_1.TXT 18 19 20 21 22 23 24 25 0003 1 A P P E A R A N C E S 2 FOR THE PLAINTIFFS: Sarah Q. Wirskye, Esq. 3 MEADOWS COLLIER, LLP 901 Main Street 4 Suite 3700 Dallas, Texas 75202 5 214.744.3700 214.747.3732 - Fax 6 7 FOR THE DEFENDANT, UNITED STATES GOVERNMENT: 8 Dennis M. Donohue, Esq. UNITED STATES DEPARTMENT OF JUSTICE 9 Tax Division PO Box 403 10 Washington, D.C. 20044 202.307.6492 11 202.307.2504 - Fax 12 Joe Pitzinger, III, Esq. UNITED STATES DEPARTMENT OF JUSTICE 13 Tax Division 717 North Harwood 14 Suite 400 Dallas, Texas 75201 15 214.880.9728 214.880.5741 - Fax 16 17 ALSO PRESENT: 18 Devin Brosseau, CFA 19 20 21 22 23 24 25 0004 1 INDEX 2 3 4 5 6 7 8 9 10 11 12 13 Appearances..................................... Exhibit List.................................... Stipulations.................................... DON CHANCE: EXAMINATION BY MR. DONOHUE................. Signature and Changes........................... Reporter's Certificate.......................... REQUESTED DOCUMENTS/INFORMATION (None) Page 2 PAGE 2 5 6 6 274 276
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270116_1.TXT 14 15 16 17 18 19 20 21 22 23 24 25 0005 1 NO. 2 2369 3 4 2400 5 6 7 8 9 2406 10 11 12 13 2429 14 15 16 2806 17 18 19 20 21 22 23 24 25 0006 1 2 3 4 5 6 7 8 9 10 11 12 2807 Bates stamped DB COBRA 04211, Option Deal Entry.................................... Document labeled Details for Trade 27919A-RMSRPT............................ 24 20 2434 Dr. Kolbe's rebuttal report to Dr. Chance and Dr. Hess............................. Dr. Kolbe's expert report in the JBJZ case..................................... 92 30 2415 2428 Don Chance's rebuttal report in the Murfam Farms case........................ Dr. DeRosa's original report............. Dr. DeRosa's rebuttal report to Dr. Chance and Dr. Hess...................... 42 30 -2402 2404 2405 Don Chance's Expert Report in the JBJZ case..................................... Don Chance's Report in the Murphy Case... Don Chance's Report in the Tesoro Case... Don Chance's rebuttal report in the JBJZ case dated June 20, 2007................. 8 32 32 192 E-mail cited in one of the Government's expert's report, subject: RGI Investments, LLC ........................ 219 DESCRIPTION CERTIFIED QUESTIONS (None)
EXHIBITS PAGE
P R O C E E D I N G S (All exhibits were pre-marked.) MR. DONOHUE: Let me state that this deposition is being taken pursuant to an agreement of the parties as to time, place, and date and also is being taken pursuant to the Federal Rules of Civil Procedure. DON CHANCE, Having been first duly sworn, testified as follows: EXAMINATION BY MR. DONOHUE: Q. Good morning, Dr. Chance. Page 3
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270116_1.TXT A. Good morning. Q. Would you prefer that I refer to you as Dr. Chance or Professor Chance or do you have a choice on that? A. Everybody asks me that, and I just say it doesn't really matter. It's up to you. Q. All right. Well, if it's okay with you, I'll refer to you as doctor. A. That's fine. Q. Anyone who gets a PhD in my view should have the privilege of being referred to by their title. A. Well, attorneys have JD as I understand, so I think we can call you doctor as well. Q. doctors. But it's not a convention we be called
All right. Could you tell us where you reside? A. I reside in Baton Rouge, Louisiana. Q. And have you ever had your deposition taken before? A. Yes. Q. And approximately how many times? A. A deposition I think I've done once. Q. And when you say that, have you testified in court before? A. Yeah. I was -- I'm separating that from a deposition. Q. Okay. And approximately how many times have you testified in court? A. Two times. Q. Well, since you had your deposition taken once before, you know what the procedure is. A. Yes. Q. The procedure -- and just to refresh your recollection -- I will ask questions and the court reporter is here to take down my questions and your answers. If my questions are unclear to you, just let me know and I'll do the best I can to rephrase the question. Do you understand that? A. Yes, I do. Q. Okay. Another sort of ground rule is is that we can't be speaking at the same time. A. Right. Q. So you have to wait until I complete my question. A. Right. Q. And sometimes that's going to be a problem because I -A. Sure. Q. -- have a tendency to be thinking. And so you have to wait until I'm totally finished with my question. A. All right. Q. Is that clear? A. Yes, I understand. Q. And this is just a formality, but is there any reason this morning and today that you cannot give a full, accurate, and complete testimony? For example, is there any reason why your judgment may be impaired for any reason? A. No. Page 4
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270116_1.TXT Q. Okay. All right. With that in mind, why don't we first start with your report in the JBJZ case, which is Exhibit 2400. I'm going to ask that you be given a copy of that. (Counsel hands document to witness.) Q. (BY MR. DONOHUE) All right. Dr. Chance, is this the report you prepared in the JBJZ case? A. Well -Q. Exhibit 2400? A. It looks like it. Q. Okay. And am I correct that for that report and your other reports you have prepared, you have attached your curriculum vitae, what is known as your CV, as an -A. That is correct. Q. -- appendix to your report, correct? A. That's correct. I thought you had stopped. Q. I told you we would have problems with this. A. You're trying to trick me up. Q. Okay. Could you turn to your appendix? I believe it's on -- your CV rather, which is on page 58. And am I correct that your CV lists essentially what is your employment-related background after your education? A. Yes. Q. Am I correct? A. As well as before. Q. And looking at it, I did not see any indication that you had a background in foreign exchange, either as a trader or any other aspect of foreign exchange. Is -- do you have any experience in that area? A. I'm not a practitioner in that area. I am an academic. I do have banking experience. But you're correct, I'm not a trader or practitioner in the area of foreign exchange. Q. Okay. You mentioned you have banking experience. What was that experience? A. Well, it's on my vitae. It says 1973 to '77, First National Bank of Birmingham, which is currently known as AmSouth, and my position was called assistant cashier and corporate services manager. And I was involved in providing services -- certain banking services to corporations. Q. But that experience in no way involved anything dealing with the foreign exchange market? A. That's correct. Q. Okay. Have you ever personally traded, yourself, options on -- foreign exchange options? A. I've not done a foreign exchange option. Q. I'm sorry. The answer -A. I've not done a foreign exchange option. I have done an option before. Q. Okay. But not a foreign exchange option? A. That's correct. Q. Are you familiar with the term "calculation agent"? Have you ever heard that term before? A. Yes. Q. And what is your understanding of the meaning of that term? A. Well, calculation agent is an institution or Page 5
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270116_1.TXT it's a party to an over-the-counter contract, and that party has the responsibility of making certain calculations, I guess. I'm trying not to use the same word, but... They're supposed to make the calculations that determine things like the market-to-market value of the contract or what the contract pays off at. On the ISDUB (phonetic) template that's used to fill out these contracts, there's a line that says calculation agent and it's blank and parties have to fill in a name for that and that becomes -- in some sense, I view it, it's a little bit like a referee. It's -- it may be one of the parties of the contract, it usually is, but it's someone who determines a number that is necessary to be used in the contract. Q. Did you see that term "calculation agent" used in any documents in this case? A. I believe it was. Q. Do you recall where? A. It probably would have been the confirmation, but I'm not absolutely sure. It is my understanding that Deutsche Bank is the calculation agent in this -in these cases. Q. What gave you that understanding? A. Well, I probably saw it. It's possible I heard it. To the best of my knowledge, you know, I probably saw it on a form, but... Q. Turn to Appendix C of your report, which is Exhibit 2400. And in your Appendix C you have a list of documents reviewed. Am I correct that this is the same set of documents you reviewed not only for your JBJZ report, but also for your Tesoro report in your -- I'll refer to it as your Murphy report? A. I'm not sure I can actually say that because I don't believe the list are identical, and I don't think there's a one-for-one mapping from one list to the other. I had certain responsibilities in this case and I needed certain things and I was given certain documents, but I know that some of these documents were not relevant to what I had to do. I'm not sure why I had them, but they weren't relevant to what I had to do. I needed the terms and conditions of the contracts, and I know I got that off of the confirmation. So the confirmation is primarily what I looked at. And I did look at a confirmation for each of the three. Now, you asked me -- I'm not trying to drift away from your question. You asked me if this is the same list. I believe if you look in all three Appendixes C, you would find that there may not be a one-to-one mapping on each of these documents. This document here matches up with a document in the other report that matches up to a document in another report. But I do have the confirmations in each of the three cases, and that's the principal information that I used. Q. How did you come to acquire the documents that are on Appendix C? A. Well, the law firm gave me the documents. Q. And how -- how did you come to get those specific documents? Did you request them or did they provide them to you? A. No, they provided me -- I did not request any Page 6
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270116_1.TXT specific documents. Q. And what did you do -- were all these -strike that question. Were these documents provided to you initially all at one time or did they come over a period of time? A. I'm not sure I remember exactly. I honestly don't know, but I know that I could not have gotten started on the case without the confirmations. I believe the confirmations came early, but, you know, I can't be certain. I just know that I wouldn't have gotten very far without the confirmations because that gave me the terms and conditions of the contract. I don't remember on each of these other documents exactly -- I know some of them came in later, but I know, as I said, that I did not use a lot of this information. My -- the scope of my responsibility, I think, was fairly limited. I know this is a big case and goes far beyond me. I know some of these documents, which are things like letters involving this transfer or that transfer, really didn't have any relevance to me. I'm not sure how I got them -- I mean, I know how I got them, but I'm not sure why I got them. Q. What did you feel the scope of your assignment was? A. The principal scope -- or the principal responsibility I had was coming up with probabilities for these options. There were several, I guess, secondary questions that are addressed in the report, such as: What was the value of the short option on the transfer day? Were the options in or out of the money on the day of the transaction, the transfer day, the termination day, and so forth? But my focus was really mostly on the probabilities of these options. Q. And when you say "probabilities," what do you mean? A. Probabilities that the options would be profitable. Q. Would be in the money, so to speak? A. Well, in the money -- you know, in the money for these options does translate into profitability, but for an ordinary option -- I'm hesitant to say that so generally because for an ordinary option in the money does not necessarily translate into profitability. It does in this particular case here. Q. Well, when I use the term "in the money," do you use that term also to mean the probability that the options would pay off? Is that what you're referring to? A. I'm assuming we're talking about this case? Q. Yes. A. And I want to be real careful because ordinarily when you're talking about a standard option, if you say in the money that does not equate necessarily to being profitable. It turns out in this case there are -- each of these options or these transactions, I should say, they have three outcomes and -- because there are two options and these three outcomes. In one of the outcomes both options Page 7
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270116_1.TXT expire out of the money, and you lose what you paid for the options. And then you have one where one is in the money and the other is out of money and -- I know this term "sweet spot" has popped up in this case, and that's what I'm talking about there. And then there's a third case where the Exchange rate is beyond both options and they -- and you end up having your long one short the other, you have a profit on one, you have a loss on the other, but you have a net profit overall. Q. And when you call that as having a net profit overall, how are you defining the term "profit"? A. Well, it would be that the payoff you receive when you exercise the option exceeds the cost you pay for the option. Q. And that's how you're defining it to be a profitable -A. Right. Q. -- transaction -A. Right. Q. -- am I correct? A. Right. Q. Okay. A. I interrupted. Q. Do you take into account in your analysis of profit other transaction costs? A. Are we talking about my original report or my rebuttal report? Q. Well, first let's talk about the original report. A. Okay. That's not taken into account in the original report. Q. Well, we'll come back to that entire area in more detail. But before we do, could you describe to us, first of all, when you were contacted by counsel to -- when was your first contact, approximately? A. I'm not sure I could put a date on that. I think we've been on this case -- I think I've been on this case about two years. I honestly couldn't tell you exactly. Q. And who was your first contact with? A. It was either Mr. Welty or Mark Thomas, and Mark is not with the firm anymore, and Joel Crouch who is still with the firm. I honestly couldn't tell you. I think Mr. Welty was the first person to contact me, but I know that I came and we had a meeting and I met all three of them. Ms. Wirskye was not involved at that time. Q. And at the point of the meeting were you told as to exactly what the scope of your assignment would be or did that come later? A. Yes, it was a -- kind of a general overview. In fact, we may have had some discussions on the phone. I know that he contacted me and said can you come to Dallas, and I said that would be easy to do. I'm only a one-hour plane ride from here. And we may have had some discussions on the phone to give me a little bit of light overview of it. But I know we had a meeting here in a room very similar to this, and he told me that, you know, there were these digital currency options. And that the issue that I would be involved in had to do with the probabilities of these options being Page 8
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270116_1.TXT profitable. And he would need me to opine or to analyze, I should say maybe first -- analyze these options, come up with some numbers, and opine about their probabilities of being profitable. Q. Other than that particular question, did he ask you to opine on other questions? A. Not at that time. I'm not sure what you mean necessarily by other questions. Q. Well -A. And he may have said at that time that there may be some other things that we'll need you to do, but, you know, that was kind of a minor detail. I don't really recall. I do know later he did subsequently ask me to do a few other things. Q. Did he explain to you at all any of the documents that the parties had obtained from third parties, including the Deutsche Bank in this litigation? A. Well, I'm not sure if I would remember that, but I know I've done a few of these cases and I know that it would -- I would have expected that there would have been documents. There wouldn't be any way I could analyze this without some documents. And whether we had a discussion about the documents or not, I don't recall. But it would have been obvious to me that they would have had to have documents, in particular the confirmation. I would need to see the terms of the contract. And, you know, I may well have said to him I'll need to see the terms of the contract. You know, he probably said well, yeah, we can get that. Q. What about any internal documents from the Deutsche Bank, did -- were you aware as to whether or not any of those documents had been obtained? A. I honestly don't know. I mean, you're asking me to remember a conversation a couple of years ago. I just have to say I don't know. Q. After you had a chance to review the documents you did receive, did you make a request, for example, for additional documents that would assist you in connection with your work? A. I don't think I did because I think that the confirmations were the primary documents that I used. In order to calculate probability I felt like I would need to know the terms of the contract. I did eventually see some other documents. As you see, there's a list there with a lot of documents and all. And I read over them, but I don't recall if I requested anything else. I know that the -- I just don't recall using anything else much except for the confirmations. Q. Did you ask counsel if, for example, the Deutsche Bank's pricing data was available? A. I probably did, but I don't recall for sure. I mean, I just can't say for sure. Q. As you review the documents on your list, do you see any documents that reflect what the Deutsche Bank's pricing data was? A. Well, there's some Deutsche Bank documents here. I don't know if any of these reflect their pricing data. Q. I'm going to hand you what's been marked as Page 9
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270116_1.TXT Exhibits 2806, 2807, and 2808. Do any of these documents look familiar? A. The first one does. The second one looks strange -- strangely unfamiliar because of the typeset is so large. I just -- I don't remember seeing the second one. And the third one -- I'm not sure about the third one. I know the first one does look familiar. Q. And do you know why? Is that on your list? A. I'm not sure. They keep track of the documents that are sent. If it's on the list, it's on the list, but I don't remember. Q. Do you know -A. I just remember it looks like something I saw. Q. Do you know what that document is? A. Well, it looks like a bank document. It's called an owe debt -- option deal entry ticket or whatever the "T" stands for. And it's some sort of a document that the bank takes when it does a transaction and it goes through the bank's accounting system and, you know, it's in effect something that's in the bank's internal system. Q. But are you just speak- -- guessing now or do you know as a fact what this document is? A. Well, I can look at the document and I can see things that I can interpret and say -- first of all, I see the word "option deal entry," and so I think, well, that's probably the bank's document. I'm pretty sure that's the bank's document. Q. But you're now guessing, right? See, I want your personal knowledge. You believe you've seen this document before, and what I want now is your personal knowledge of what this document is. And your personal knowledge could have been acquired from your review of other documents. But do you have any personal knowledge of what this document is? A. I'm still unclear about your question. Now, if you hand me a document like this and I can look at the words that are down the left column and I can look at the words down the right column, this looks to me like a bank document that says that a transaction was done on a certain day, and there were certain terms in that transaction. It has a certain expiration day. And there's entries here that sort of refer to things that the bank may have done. Currency premium is paid in U.S. dollars, et cetera, et cetera. So I'm giving you an interpretation of what I see in this document based on my experience. Q. As you sit here today, correct? MS. WIRSKYE: Objection. Form. A. As opposed to what? Q. (BY MR. DONOHUE) Well, as opposed to a document, for example, that you had used in connection with your work? A. Well, I did not use the bank documents to make my calculations. As I said, this does look like something that I remember seeing. Q. If you, for example, had this document at the time you were doing your analysis, do you know whether or not you would have used it? A. Not necessarily. Q. And why not? Page 10
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270116_1.TXT A. Well, a couple of reasons. One, I felt it was fairly important that I try to work as independently of the bank as I could. If I just mimic what the bank does and come up with the exact same thing the bank does, I'm not sure that you need an expert witness to do that. And I tried to work independently. And I took the information off the confirmations and I tried to make the most independent and unbiased assessment as I possibly could. Now, I vaguely recall -- I know that's a rather murky term -- but I vaguely recall in looking over these numbers and wondering about some of them like -- and, again, I can't remember exactly what this was, but some of the numbers like the amount -- it seems to me that the amount they were doing in the form of a hedge, they didn't look right. And I started having questions about some of these numbers. How could they have come up with some of the numbers they did. I said, well, I'm actually going to try to work independent of the bank anyway. So basically I didn't use their sheets. Q. See, I'm a little confused. Take a look at -on Exhibit 2806 what is known as a Bates -A. Wait a minute. Where's the number? Oh, I see. Q. Take a look at the Bates Stamp number at the very bottom. Do you see that number DB COBRA 04211, do you see that? A. Yes. Q. Now, take a look at your Appendix C of the documents that you reviewed. I don't see any Bates Stamped numbers with a DB COBRA on it. Am I correct? A. I guess. I haven't looked over it, but... Q. Well, if you just take a look at -A. Well, I mean, I believe you. Q. Wait until I finish. Take a look at the beginning and ending documents. The documents you were supplied -- and I notice all have a Z zero on it, and they -- on the second page, you have a page and a half of documents. I don't see any DB COBRA documents. Am I correct? A. That's the way it looks. Q. So is it fair to say that this is not a document that you have at least included in the documents that you reviewed in Appendix C? MS. WIRSKYE: Objection. Form. THE WITNESS: I answer, right? MS. WIRSKYE: Yes. A. The list of documents that is on here was provided to me by the law firm, and I made the assumption that the list was correct. As I said, I only really used the confirmations. But it's my understanding they keep track of the list of documents that are sent to me, and all I can tell you right now is this looks familiar. Q. (BY MR. DONOHUE) But you can't -A. If it's not on the list, it's because it was not on the list that was sent to me. Q. Okay. But if it looks familiar and it's not on the list, is it because the list is wrong or because you were shown this at some point after you did your report? Page 11
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270116_1.TXT MS. WIRSKYE: Objection. Form. A. Oh, no, I definitely -- if I did see it -- and as I said, it looked familiar -- it was definitely before the report because the report was only done a few months ago. Q. (BY MR. DONOHUE) Okay. All right. So even though it looks familiar, it's not a document that appears to be on your list. So is it fair to say that even though it looks familiar, you did not even use this document in connection with your report -MS. WIRSKYE: Objection. Q. (BY MR. DONOHUE) -- in preparation of your report? MS. WIRSKYE: Objection. Form. A. As I said, I did not use this document in preparing my report. Q. (BY MR. DONOHUE) Okay. All right. Now take a look on Exhibit 2806 at the second to last row, do you see that term on the first page -A. Are you on the -Q. The first page. A. Yeah. Q. Do you see that term "Volatility to Expiry"? A. Yes. Q. Do you see that? Do you know what that means? A. Well, that's their opinion. Whoever entered this, that's this person's opinion of the bid and the ask volatility over the horizon of the transaction. Q. And when you say "this person," are you referring to, for example, that's the Deutsche Bank's? A. Well, some human being had to put -Q. Right. A. -- these numbers in here, so... Q. So -A. Now, when I said this -- excuse me. When I said this was Deutsche Bank's before -- and I don't see Deutsche Bank's name on it -- I'm drawing the conclusion that it's Deutsche Bank because it says option deal entry. Q. Well, isn't it there right up at the top? A. Oh, that's right. It's very small. Q. Now, if -- you're saying this is a reference to a bid and ask volatility, am I correct? A. Yes. Q. Had you had that information at the time you did your report, is there something you may have used that information for in doing your analysis? A. I'm not sure I follow that question. You said is there something -- might I have used that information when I did my analysis? Q. Right. A. I don't think so. As I said, I tried to -- I tried to be as independent of the bank as I possibly could, and I don't believe that if I had just taken the numbers off of the bank's numbers, I would have been acting independent. I know where you're actually heading with this on volatility. A
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