Nonlinearity, correlation and the valuation of employee stock options
Statistics Theory
2008-12-10 v1 Probability
Statistical Finance
Statistics Theory
Abstract
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.
Keywords
Cite
@article{arxiv.math/0511234,
title = {Nonlinearity, correlation and the valuation of employee stock options},
author = {M. R. Grasselli},
journal= {arXiv preprint arXiv:math/0511234},
year = {2008}
}
Comments
17 pages, 8 figures