Optimal Exercise Of Executive Stock Options And Implications For Firm Cost
Source: New York University (Stern)
As options have become a major component of corporate compensation, the demand for better valuation has intensified. The difficulty is that option cost depends on the exercise policies of executives who face hedging constraints. This paper analyzes the optimal policy for a general utility-maximizing executive holding a nontransferable option. Author show analytically how the policy varies with risk aversion, wealth, and dividend rate, and when the policy is characterized by a single stock price boundary. Author also provide an example with a split continuation region.