Employee Stock Options – Suboptimal Exercise

File Name: Employee Stock Options – Suboptimal Exercise

Location: Modeling Toolkit | Real Options

Brief Description: Values an employee stock option where suboptimal exercise behavior is considered and modeled

Requirements: Modeling Toolkit, Real Options SLS

This model shows how suboptimal exercise behavior multiples can be included in the analysis and how the custom variables list can be used as seen in Figure 173.1 (example file used: ESO Suboptimal Behavior). The terminal equation (TE) is the same as the previous example, but the intermediate equation (IE) assumes that the option will be suboptimally executed if the stock price in some future state exceeds the suboptimal exercise threshold times the strike price. Notice that the intermediate equation during vesting and blackout periods (IEV) is not used because we did not assume any vesting or blackout periods. Also, the Suboptimal exercise multiple variable is listed on the customs variable list with the relevant value of 1.85 and a starting step of 0. This means that 1.85 is applicable starting from step 0 in the lattice all the way through to step 100. The results again are verified through the ESO Toolkit (Figure 173.2).

Figure 173.1: SLS results of a call option with suboptimal exercise behavior

Figure 173.2: ESO Toolkit results of a call option accounting for suboptimal behavior


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