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Indexed Executive Stock Options with a Ratchet Mechanism and Average Prices

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  • Jian Wu

    (Pôle Finance Responsable - Rouen Business School - Rouen Business School)

  • Wei Yu

Abstract

In this article, we present a new type of executive stock option, dubbed the indexed stock option with a ratchet mechanism and average prices. We also derive its pricing model and investigate its incentive implications. Like an indexed option, the proposed option links its strike price to a benchmark, so as to eliminate common risks beyond the reach of the executive's control and reinforce the option's incentive effect. With the ratchet mechanism, the proposed option enables its holder to enjoy a series of compensations spread over a period of time, thereby developing the executive's loyalty towards the firm. Furthermore, in order to minimize impacts of a rough market movement and those of a possible price manipulation, average prices are taken into account in the payoff of the proposed option.

Suggested Citation

  • Jian Wu & Wei Yu, 2003. "Indexed Executive Stock Options with a Ratchet Mechanism and Average Prices," Post-Print hal-00566633, HAL.
    • Handle: RePEc:hal:journl:hal-00566633
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