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Valuing employee reload options under the time vesting requirement

2005; Taylor & Francis; Volume: 5; Issue: 1 Linguagem: Inglês

10.1080/14697680400014336

1469-7696

Min Dai, Yue Kuen Kwok,

Capital Investment and Risk Analysis

Abstract Upon the exercise of an employee stock option, the embedded reload provision entitles the holder to receive additional units of new options from the employer. The number of units of new options received is equal to the number of shares tendered as payment of strike and the new strike is set at the prevailing stock price. The reload provision may be subject to a time vesting requirement, that is, after each exercise, the employee is prohibited from exercising the reload until the end of a vesting period. In this paper, we construct an efficient numerical algorithm that computes the market value of the employee reload options under a time vesting requirement. Also, we explore the analytic properties of the price functions and optimal exercise policies of the employee reload options. Acknowledgements Min Dai would like to acknowledge the receipt of research grant CNSF (No. 10301002) for the completion of this work.