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Hurdle Rate: Executive Stock Options |
| Joe Cheung, Charles Corrado, J.B. Chay, and Do-Sub Jung |
Abstract |
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Executive stock options with a rising strike price are a recent innovation in executive compensation in Australia and New Zealand. These options combine a dividend protection feature and a strike price that increases at a hurdle rate set with reference to a cost of capital estimate. With a constant dividend yield, the strike price becomes a path-dependent function of the stock price and exact analytic valuation becomes intractable. However, path-dependent American options can be valued using a Monte Carlo approach proposed in Longstaff and Schwartz (2001). We examine procedures for valuing these options and compare them with Black and Scholes (1973) and Merton (1973) formula valuations.
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Keywords |
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EXECUTIVE STOCK OPTIONS; MONTE CARLO METHODS.
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Contact DetailsJoe CheungUniversity of Auckland, New Zealand. Charles Corrado Department of Commerce, Massey University, Albany, Private Bag 102 904 NSMC, Auckland, New Zealand. Email: c.j.corrado@massey.ac.nz J.B. Chay Sung Kyun Kwan University, Korea. Do-Sub Jung Sun Moon University, Korea. |
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