A Critical Review of the Fair Value Settlement Procedure for Stock Options

Applied Finance Letters, Vol. 4, No. 1&2, pp. 20-25, 2015

15 Pages Posted: 5 Jul 2013 Last revised: 20 Jan 2016

See all articles by Oege Pennin

Oege Pennin

Rabobank International, Netherlands

Martijn J. van den Assem

VU Amsterdam - School of Business and Economics

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: December 1, 2014

Abstract

We review the European practice of fair value settlement of stock options after a successful takeover bid. We argue on both fundamental and practical grounds that the inherent complexity, arbitrariness and inaccuracy of fair value calculations call for replacement by intrinsic value settlement. This alternative is simple, transparent, well-defined, and common practice at other exchanges.

Keywords: fair value, intrinsic value, stock option, implied volatility, option pricing, takeover

JEL Classification: G28, G23

Suggested Citation

Pennin, Oege and van den Assem, Martijn J. and Zwinkels, Remco C.J., A Critical Review of the Fair Value Settlement Procedure for Stock Options (December 1, 2014). Applied Finance Letters, Vol. 4, No. 1&2, pp. 20-25, 2015. Available at SSRN: https://ssrn.com/abstract=2289463 or http://dx.doi.org/10.2139/ssrn.2289463

Oege Pennin

Rabobank International, Netherlands ( email )

Utrecht 3500 HG
Netherlands

Martijn J. Van den Assem

VU Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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