Abstract

http://ssrn.com/abstract=1010399
 
 

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A Finite Difference Model for Valuation of Employee Stock Options


Graeme West


Financial Modelling Agency

January 14, 2009


Abstract:     
Employee stock option grants are a common incentive for employees and are a key remuneration device. These options differ from ordinary options in that they cannot be traded nor hedged. Nevertheless, the work of Carpenter enables one to price these options within a Black-Scholes framework, with one additional parameter calibrated from historical data. We develop a model where the price of the grant obeys the Black-Scholes differential equation with two additional parameters: one which controls the rate at which employees forfeit unvested options, and another which controls the rate at which employees exercise vested options. We implement a finite difference scheme for computation of the option values derived from this model.

Number of Pages in PDF File: 12

Keywords: Employee stock option, early exercise, finite difference scheme

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Date posted: October 6, 2007 ; Last revised: March 13, 2009

Suggested Citation

West, Graeme, A Finite Difference Model for Valuation of Employee Stock Options (January 14, 2009). Available at SSRN: http://ssrn.com/abstract=1010399 or http://dx.doi.org/10.2139/ssrn.1010399

Contact Information

Graeme West (Contact Author)
Financial Modelling Agency ( email )
19 First Ave East
Parktown North, 2193
South Africa
+27-11-4472901 (Phone)
+27-11-4472901 (Fax)
HOME PAGE: http://www.finmod.co.za
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