A top-down approach for the multiple exercises and valuation of employee stock options
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Publication:5114675
DOI10.1142/S0219024920500041zbMATH Open1443.91297arXiv1906.03562OpenAlexW2996018960MaRDI QIDQ5114675FDOQ5114675
Publication date: 25 June 2020
Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)
Abstract: We propose a new framework to value employee stock options (ESOs) that captures multiple exercises of different quantities over time. We also model the ESO holder's job termination risk and incorporate its impact on the payoffs of both vested and unvested ESOs. Numerical methods based on Fourier transform and finite differences are developed and implemented to solve the associated systems of PDEs. In addition, we introduce a new valuation method based on maturity randomization that yields analytic formulae for vested and unvested ESO costs. We examine the cost impact of job termination risk, exercise intensity, and various contractual features.
Full work available at URL: https://arxiv.org/abs/1906.03562
Recommendations
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Derivative securities (option pricing, hedging, etc.) (91G20) Jump processes on discrete state spaces (60J74)
Cites Work
- ACCOUNTING FOR RISK AVERSION, VESTING, JOB TERMINATION RISK AND MULTIPLE EXERCISES IN VALUATION OF EMPLOYEE STOCK OPTIONS
- The Mathematics of Financial Derivatives
- A Top-Down Approach to Multiname Credit
- A general framework for evaluating executive stock options
- The Valuation of Executive Stock Options in an Intensity-Based Framework *
- Fourier space time-stepping for option pricing with Lévy models
- Pricing executive stock options under employment shocks
- Risk aversion and block exercise of executive stock options
- Exponential Hedging with Optimal Stopping and Application to Employee Stock Option Valuation
- ESO Valuation with Job Termination Risk and Jumps in Stock Price
Cited In (4)
- On the valuation of non-transferable employee share option plans
- A reduced form model for ESO valuation. Modelling the effects of employee departure and takeovers on the value of employee share options
- ACCOUNTING FOR RISK AVERSION, VESTING, JOB TERMINATION RISK AND MULTIPLE EXERCISES IN VALUATION OF EMPLOYEE STOCK OPTIONS
- Employee stock options: an up-and-out protected barrier call
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