VALUATION OF EMPLOYEE RELOAD OPTIONS USING UTILITY MAXIMIZATION APPROACH

Ka Wo Lau () and Yue Kuen Kwok ()
Additional contact information
Ka Wo Lau: Department of Computer Science, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China
Yue Kuen Kwok: Department of Mathematics, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 05, 659-674

Abstract: The reload provision in an employee stock option is an option enhancement that allows the employee to pay the strike upon exercising the stock option using his owned stocks and to receive new "reload" stock options. The usual Black–Scholes risk neutral valuation approach may not be appropriate to be adopted as the pricing vehicle for employee stock options, due to the non-transferability of the ownership of the options and the restriction on short selling of the firm's stocks as hedging strategy. In this paper, we present a general utility maximization framework to price non-tradeable employee stock options with reload provision. The risk aversion of the employee enters into the pricing model through the choice of the utility function. We examine how the value of the reload option to the employee is affected by the number of reloads outstanding, the risk aversion level and personal wealth. In particular, we explore how the reload provision may lower the difference between the cost of granting the option and the private option value and improve the compensation incentive of the option award.

Keywords: Employee stock options; utility maximization; reload provision; compensation incentives; dead-weight loss (search for similar items in EconPapers)
Date: 2005
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S0219024905003189
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:08:y:2005:i:05:n:s0219024905003189

Ordering information: This journal article can be ordered from

DOI: 10.1142/S0219024905003189

Access Statistics for this article

International Journal of Theoretical and Applied Finance (IJTAF) is currently edited by L P Hughston

More articles in International Journal of Theoretical and Applied Finance (IJTAF) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().