Evaluating Executive Stock Options Using the Binomial Option Pricing Model

Posted: 20 Dec 1998

See all articles by Sigurjon Arnason

Sigurjon Arnason

Humboldt University of Berlin

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Date Written: November 1994

Abstract

In this note we show how to use the binomial option pricing model to value executive stock options. Since executive stock options are tailor made and there is no standardized executive stock option, we used the stock options given to Mr. R. Kovacevich, CEO of Norwest Corporation as the example to work with. We find that the Accelerated Ownership Non-Qualified Stock Options embedded in executive stock options add substantially to their value. In the example we look into, it contributes to a quarter of the total value of the option. The manuscript is available as a Microsoft-Word document with embedded Excel 4.0 worksheets. It is meant as a teaching aid for advanced undergraduate and masters level courses in option pricing.

JEL Classification: G32

Suggested Citation

Arnason, Sigurjon and Jagannathan, Ravi, Evaluating Executive Stock Options Using the Binomial Option Pricing Model (November 1994 ). Available at SSRN: https://ssrn.com/abstract=5767

Sigurjon Arnason

Humboldt University of Berlin ( email )

Unter den Linden 6
D-10178 Berlin, AK 10099
Germany

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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