Analytic Pricing of Employee Stock Options
43 Pages Posted: 3 Nov 2004
Date Written: July 19, 2006
Abstract
We introduce a model that captures the main properties that characterize employee stock options (ESO), in particular, the likelihood of early voluntary exercise and the obligation to exercise immediately if the employee leaves the firm, except if this happens before options are vested, in which case the options are forfeited. We derive an analytic formula for the price of the ESO and analyze its properties and sensitivity with respect to the model parameters.
Keywords: Employee stock options, early exercise, analytic formula
JEL Classification: G12, M41, M52, J33, M46
Suggested Citation: Suggested Citation
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