Valuing Employee Reload Options Under Time Vesting Requirement

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 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 efficient numerical algorithms that compute the market value of the employee reload options under time vesting requirement. Also, we explore the analytic properties of the price functions and optimal exercise policies of the employee reload options.

Number of Pages in PDF File: 21

Keywords: employee reload option, time vesting requirement, numerical algorithm

JEL Classification: G13

working papers series