Nonlinearity, correlation and the valuation of employee stock options
We propose a discrete time algorithm for the valuation of employee stock options based on exponential indifference prices and taking into account both the possibility of partial exercise of a fraction of the options and the use of a correlated traded asset to hedge part of their risk. We determine the optimal exercise policy under this conditions and present numerical results showing how both effects can significantly change the value of the option for an employee, as well as its cost for the issuing firm.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Carpenter, Jennifer N., 1998.
"The exercise and valuation of executive stock options,"
Journal of Financial Economics,
Elsevier, vol. 48(2), pages 127-158, May.
- Jennifer Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-10, New York University, Leonard N. Stern School of Business-.
- Brian J. Hall & Kevin J. Murphy, 2000.
"Stock Options for Undiversified Executives,"
NBER Working Papers
8052, National Bureau of Economic Research, Inc.
- L. C. Rogers & Jose A. Scheinkman, 2003. "Optimal Exercise of American Claims When Markets Are Not Complete," Levine's Working Paper Archive 506439000000000114, David K. Levine.
- Huddart, Steven, 1994. "Employee stock options," Journal of Accounting and Economics, Elsevier, vol. 18(2), pages 207-231, September.
- A. Oberman & T. Zariphopoulou, 2003. "Pricing early exercise contracts in incomplete markets," Computational Management Science, Springer, vol. 1(1), pages 75-107, December.
- Jakša Cvitanić & Zvi Wiener & Fernando Zapatero, 2008. "Analytic Pricing of Employee Stock Options," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 683-724, April.
- Marek Musiela & Thaleia Zariphopoulou, 2004. "A valuation algorithm for indifference prices in incomplete markets," Finance and Stochastics, Springer, vol. 8(3), pages 399-414, 08.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:math/0511234. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.