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Analytic Pricing of Employee Stock Options

43 Pages Posted: 3 Nov 2004  

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Fernando Zapatero

University of Southern California - Marshall School of Business

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration

Date Written: July 19, 2006

Abstract

We introduce a model that captures the main properties that characterize employee stock options (ESO), in particular, the likelihood of early voluntary exercise and the obligation to exercise immediately if the employee leaves the firm, except if this happens before options are vested, in which case the options are forfeited. We derive an analytic formula for the price of the ESO and analyze its properties and sensitivity with respect to the model parameters.

Keywords: Employee stock options, early exercise, analytic formula

JEL Classification: G12, M41, M52, J33, M46

Suggested Citation

Cvitanic, Jaksa and Zapatero, Fernando and Wiener, Zvi, Analytic Pricing of Employee Stock Options (July 19, 2006). Available at SSRN: https://ssrn.com/abstract=612881 or http://dx.doi.org/10.2139/ssrn.612881

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

Fernando Zapatero (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States
213-740-6538 (Phone)
213-740-6650 (Fax)

Zvi Wiener

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem, 91905
Israel
(972)-2-588-3049 (Phone)
(972)-2-588-3105 (Fax)

HOME PAGE: http://pluto.mscc.huji.ac.il/~mswiener/zvi.html

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