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Evaluating Incentive Options

Author

Listed:
  • Wei Xiong
  • Ronnie Sircar

Abstract

We provide an analytical and flexible framework to evaluate incentive options. Our model not only considers vesting periods and trading and hedging restrictions on the holders, but also specifically includes provisions of reloading and resetting to capture the fact that firms tend to grant more options after existing options are either exercised or become deep out of the money. By treating the incentive option as a flow of barrier options, we are able to obtain a near-explicit formula for the option value. Our model allows us to discuss many issues related to incentive options such as their issuing cost, exercising strategies, and induced incentives. Especially, we highlight some significant interactions among different features of incentive options

Suggested Citation

  • Wei Xiong & Ronnie Sircar, 2004. "Evaluating Incentive Options," Econometric Society 2004 North American Winter Meetings 253, Econometric Society.
    • Handle: RePEc:ecm:nawm04:253
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    References listed on IDEAS

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    More about this item

    Keywords

    Executive Stock Options; Incentives; Resetting and Reloading; Subjective Valuation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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