American GARCH employee stock option valuation |
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Authors: | Angel León Antoni Vaello-Sebastià |
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Institution: | 1. University of Alicante, Dept. Economíca Financiera, Campus de San Vicente del Raspeig, Ap. 99, E-03080 Alicante, Spain;2. University of Illes Balears, Dept. Economía de la Empresa. Crtra. Valldemossa km. 7.5, E-07122, Palma de Mallorca, Spain |
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Abstract: | We implement a flexible simulation-based approach for the fair value of employee stock option (ESO) that accounts for the vesting period, departure risk and voluntary suboptimal early exercise. We introduce GARCH effects on the underlying asset and we analyze the price bias with respect to the constant volatility case. We also perform a sensitivity analysis with respect to changes in several ESO characteristics. We compare this valuation with FAS 123 method revealing a FAS overvaluation. Finally, we value a real ESO plan providing the confidence intervals for the estimated ESO prices. |
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Keywords: | C15 C22 G13 |
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