Hurdle Rate: Executive Stock Options

Joe Cheung, Charles Corrado, J. B. Chay and Do-Sub Jung
Additional contact information
Joe Cheung: University of Auckland, New Zealand.
J. B. Chay: Sung Kyun Kwan University, Korea.
Do-Sub Jung: Sun Moon University, Korea.

Australian Journal of Management, 2006, vol. 31, issue 1, 29-40

Abstract: Executive stock options with a rising strike price are a recent innovation in executive compensation in Australia and New Zealand. These options combine a dividend protection feature and a strike price that increases at a hurdle rate set with reference to a cost of capital estimate. With a constant dividend yield, the strike price becomes a path-dependent function of the stock price and exact analytic valuation becomes intractable. However, path-dependent American options can be valued using a Monte Carlo approach proposed in Longstaff and Schwartz (2001). We examine procedures for valuing these options and compare them with Black and Scholes (1973) and Merton (1973) formula valuations.

Keywords: EXECUTIVE STOCK OPTIONS; MONTE CARLO METHODS (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:31:y:2006:i:1:p:29-40

DOI: 10.1177/031289620603100103

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