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Valuing Complex Stock Options Containing Reload Features

Author

Listed:
  • Hill John W

    (Kelley School of Business, Indiana University)

  • Kamma Sreenivas

    (Kelley School of Business, Indiana University)

  • Karam Yassir

    (Clifton Gunderson, LLP)

Abstract

The need to value complex options containing reload features is becoming increasingly more common as such options become more proliferate. Traditionally, two types of valuation methods have been used: the intrinsic method and closed-form models, such as Black-Scholes. These methodologies undervalue options with reload features, a fact recently recognized by both accounting regulators and some courts which have sanctioned the use of binomial/lattice methodology. Such undervaluation can be costly to clients in litigation such as divorce cases. This study analyzes these alternative methodologies and reveals the extent of such undervaluation when the Black-Scholes method is used. It also provides evidence of the sensitivity of the resulting value to various assumptions required by binomial/lattice models.

Suggested Citation

  • Hill John W & Kamma Sreenivas & Karam Yassir, 2008. "Valuing Complex Stock Options Containing Reload Features," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 3(1), pages 1-44, October.
    • Handle: RePEc:bpj:jbvela:v:3:y:2008:i:1:n:10
    DOI: 10.2202/1932-9156.1051
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    References listed on IDEAS

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    1. Simon Benninga, 2000. "Financial Modeling, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262024829, December.
    2. Bettis, J. Carr & Bizjak, John M. & Lemmon, Michael L., 2005. "Exercise behavior, valuation, and the incentive effects of employee stock options," Journal of Financial Economics, Elsevier, vol. 76(2), pages 445-470, May.
    3. Carpenter, Jennifer N., 1998. "The exercise and valuation of executive stock options," Journal of Financial Economics, Elsevier, vol. 48(2), pages 127-158, May.
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