Does the Model Matter? A Valuation Analysis of Employee Stock Options

31 Pages Posted: 13 May 2004

See all articles by Manuel Ammann

Manuel Ammann

University of St. Gallen - School of Finance

Ralf Seiz

University of St. Gallen - Swiss Institute of Banking and Finance

Date Written: November 2003

Abstract

We present a numerical analysis of valuation models for employee stock options. In particular, we analyze the impact of the model on the resulting option prices and investigate the sensitivity of pricing differences between models with respect to changes in the parameters. We show that, for most models such as the FASB 123 model, the utility-maximizing model by Rubinstein, the Hull-White model, and a simple reference model proposed in this paper, the price reduction relative to standard options is uniquely determined by the expected life of the option. In fact, with the exception of the FASB 123 model, pricing differences are negligible if the models are calibrated to the same expected life of the option. Consequently, the application of models with several hard-to-estimate parameters such as the utility-maximizing model can be greatly simplified by this calibration approach because expected life is easier to estimate than utility parameters.

Keywords: Employee stock options, option pricing, option exercise

Suggested Citation

Ammann, Manuel and Seiz, Ralf, Does the Model Matter? A Valuation Analysis of Employee Stock Options (November 2003). EFMA 2004 Basel Meetings Paper. Available at SSRN: https://ssrn.com/abstract=499782 or http://dx.doi.org/10.2139/ssrn.499782

Manuel Ammann (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Ralf Seiz

University of St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstrasse 52
St. Gallen, CH-9000
Switzerland

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