A Top-Down Approach for the Multiple Exercises and Valuation of Employee Stock Options

Tim Leung and Yang Zhou

Papers from arXiv.org

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.

Date: 2019-06, Revised 2019-09
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Journal Article: A TOP-DOWN APPROACH FOR THE MULTIPLE EXERCISES AND VALUATION OF EMPLOYEE STOCK OPTIONS (2020)
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