FI.Chapter9 - .J G;e.x Ji)j...

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;e.x F"sgta;a*iaE *p"tner*"aa *n*i ;appEa'rl;*En{Faes lrtl eorparrate iHErr;ilr'rs;* ' Ji, )j /' icrosoft has grantcd options to bLry more than 800 million shares b its cmplovees, or about 16,000 'ori. r,, p, r per.on. Of ,- p,lur.e. hnr. le\\er .,pri.,r' .rn.l -'rr! \..!" ror. hu nrv\^ny!., .|. :r.llr.,r. .'l'it oi options. Microsoft isn't the onl)' companv \1r\ nr. E,i-B' r' .: F. rr ot AIr"n, .'. Cltigroup, IBM, lPMorgan Chase, and F.rJ .,r ,,rrorrr the mnn\ ,^n'l, rr. tl.,I h;rve granted options to buv nlore than .00 mil1ron .hn.c. .o th, ir .mpl',)"., lllell,r !,,, I nc\l i,,b i. \illr d rrcl, l,rll 1 ., Iir.r,Li I -en i, p. ompdr)\ ^r., nr,,n,. facturer, you r'!'ill probably rcccivc stock options, so it's imporiant thai you under- In a typical grani, you receil'e optuns 'll^f iny \,rr lupLr,lr--e-h"re-,,r .1,\1.,1 ,l i,J rri,r.trhi,hr-. .'llFJ rl.^,.ril, pr. .',. orr or before a stated expiratn daic. Most pl.r'r- l,.rvF ., r. .r'nB p, i,'d.,l] nl .lr yor can't exercise the options. For exanplc, slrpposc yoLr nrc grantcd 1,000 options rvith :r' rrL l'r r( L', \.rr.,,r e\r'. .','." U".",,' r^.r^ fro,n rorv, and a vesting period of 3 vcars. Evon ii ihe sbck price rises above S50 during the lirst 3 !,cafs, you can't exercise the options .lLre b ihc vesting requirement. After 3 ycafs, if vou arc still r{ith the companv you hale ihc right to e\ercise the options. For cxanrpk', if ihe siock toes up to 5110, you could pav the conpany $500,000) = $j50,000 rr,l r'', rr, ,f0n -1,.,.e. of -to.l (o h $l l{),00{). Howcvcr if you don't exercise the opiions $'ithjn 10 years, they will expire and thus bc worthless. Ilvcn Lhouth thc !csting rcquirement pre vcnls yolr ff.m cxcrcisir8 lhe opiions the mo)Icnt ihoy aro granted to you, the options clcarly havc some immediate val1lc. l-l" r't,'f,. rt ) or. re.hun,rnS bntq rer Jifl r- , nt j,l, ,'fter- \vl,.,, cpri^n, Jrc :,,\,r vp.l, yolr will nccd a way b .letermine the value of ihc altcrnaiivc options. This chapter cxpl.ins ho$,Lo value options, so read on. G,:. ..,".J. .. daej isl, Mic,o:oh ond 5ome ofier.omp.n es nopped gronifg opro^r otbJ. c,oige n.c.o,d,ig €g!.rod: rhor
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314 Chopter 9 Oplions ond ApDlicollons in Comordlo Finonce projects alow rnanagers to make shat€c or tactical changes in plans as market con- ditions change. The existence of these "embedded options' often mean6 the diffeF ence between a successfuI pmject and a failur€. Unde$tanding basjc fhancrnl options can help you manate the value inlercnt in these real opdons. Second, many compani€s use derivatives, which are in essence financial options, to manage risk, so an unde$tanding of financial options is necessary b€forc tackling derivatives. Third, option pdcing theory provides insights into tlrc optinal debt/equity choice, especial-
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This note was uploaded on 06/08/2009 for the course FI 601-602 FI601-602 taught by Professor Prof.geary during the Spring '09 term at New Haven.

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FI.Chapter9 - .J G;e.x Ji)j...

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