Indexed Executive Stock Options with a Ratchet Mechanism and Average Prices

Jian Wu and Wei Yu
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Jian Wu: Pôle Finance Responsable - Rouen Business School - Rouen Business School

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Abstract: In this article, we present a new type of executive stock option, dubbed the indexed stock option with a ratchet mechanism and average prices. We also derive its pricing model and investigate its incentive implications. Like an indexed option, the proposed option links its strike price to a benchmark, so as to eliminate common risks beyond the reach of the executive's control and reinforce the option's incentive effect. With the ratchet mechanism, the proposed option enables its holder to enjoy a series of compensations spread over a period of time, thereby developing the executive's loyalty towards the firm. Furthermore, in order to minimize impacts of a rough market movement and those of a possible price manipulation, average prices are taken into account in the payoff of the proposed option.

Date: 2003-12
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Published in Finance, 2003, vol. 24 (n° 2), pp. 85-127

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00566633

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