File Name: Employee Stock Options – Simple Bermudan Call Option
Location: Modeling Toolkit | Real Options Models
Brief Description: Computes the Bermudan call option (the option is exercisable at any time up to and including maturity except during certain blackout periods) using binomial lattices and closed-form solutions
Requirements: Modeling Toolkit, Real Options SLS
Figure 171.1 illustrates the Real Options SLS model Employee Stock Options – Simple Bermudan Call Option with Vesting on how an employee stock option (ESO) with a vesting period and blackout dates can be modeled. Enter the blackout steps (0-39). Because the blackout dates input box has been used, you will need to enter the Terminal Node Equation (TE), Intermediate Node Equation (IE), and Intermediate Node Equation During Vesting and Blackout Periods (IEV). Enter Max(Stock-Strike,0) for the TE; Max(Stock-Strike,0,OptionOpen) for the IE; and OptionOpen for IEV (example file used: ESO Vesting). This means the option is executed or left to expire worthless at termination; execute early or keep the option open during the intermediate nodes; and keep the option open only and no executions are allowed during the intermediate steps when blackouts or vesting occurs. The result is $49.73 (Figure 171.1), which can be corroborated with the use of the ESO Valuation Toolkit (Figure 171.2).
ESO Valuation Toolkit is another software tool developed by the author at Real Options Valuation, Inc. (see www.realoptionsvaluation.com for more details), specifically designed to solve ESO problems following the 2004 FAS 123R. In fact, this software was used by the Financial Accounting Standards Board to model the valuation example in its final FAS 123R Statement in December 2004. Before starting with ESO valuations, it is suggested that you read Valuing Employee Stock Options (Wiley, 2004), another book by the author, as a primer.
Figure 171.1: SLS results of a vesting call option
Figure 171.2: ESO Valuation Toolkit results of a vesting call option