Optimal exercise of executive stock options |
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| Authors: | L C G Rogers José Scheinkman |
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| Institution: | (1) Statistical Laboratory, University of Cambridge, Cambridge, CB3 0WB, UK;(2) Department of Economics, Princeton University, Princeton, NJ 08540-5296, USA |
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| Abstract: | Valuing executive stock options is a challenging problem, because the standard risk-neutral valuation of those options is
not appropriate; the executive is not allowed to trade the stock of the firm, so is not operating in a complete market. As
this paper shows, an executive holding many American-style call options on his firm’s stock will optimally exercise the options
bit by bit, whereas a risk-neutral valuation of the options would assume that all are exercised at the same time. Comparative
statics of the optimal exercise policy show many surprising features.
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| Keywords: | Stock option Optimal exercise Constant absolute risk aversion |
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