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CMA Final · Corporate Financial Reporting · Valuation of Shares (including Determination of Goodwill)

Meridian Pharma Ltd values a three-year option on exchange-traded shares of Kaveri Ltd. The only volatility figure it has is derived from Kaveri's historical share prices. Under Ind AS 113, how is this input classified?

The input is Level 3. Ind AS 113 cites historical volatility from past share prices for a three-year option as a Level 3 example, because it typically does not reflect market participants' expectations of future volatility, even if it is the only information available.

  1. ALevel 1 input, as the shares are exchange-traded
  2. BLevel 2 input, as historical prices are observable
  3. CLevel 3 input, as historical volatility typically does not represent market participants' expectations of future volatilityCorrect
  4. DNot an input, as volatility is outside Ind AS 113

Explanation

Ind AS 113 gives historical volatility derived from past share prices as an example of a Level 3 input. It typically does not represent current market participants' expectations about future volatility, even when it is the only information available. Option A is wrong because the option itself is not the exchange-traded instrument whose quoted price is being used.

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