[...]... ESO valuation results Analyze report feature ESO functions Using ESO functions in existing spreadsheets Auditing the formulas 91 92 93 94 95 96 98 99 10 1 10 2 10 5 10 6 10 7 11 6 11 7 13 5 13 5 14 2 14 7 15 3 15 9 16 0 16 0 16 1 16 2 16 3 16 3 16 4 List of Figures and Tables xiii TABLES Table 3 .1 Effects of Changing Risk-Free Rates on Option Value Table 3.2 Effects of Changing Risk-Free Rates with Exotic Inputs on Option... Spreadsheets 13 3 13 3 13 5 13 6 13 6 13 6 14 0 14 1 14 5 14 5 14 7 15 7 15 8 15 8 15 8 16 1 16 4 PART FOUR Options Valuation Results Tables APPENDIX Getting Started with the Options Valuation Results Tables Thirty-Five Percent Volatility and 3-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates Seventy Percent Volatility and 3-Year Maturity ESOs with Varying Stock Price,... 8 .14 Figure 8 .15 Figure 8 .16 Figure 8 .17 Figure 8A .1 Figure 8A.2 Figure 10 .1 Figure 10 .2 Figure 10 .3 Figure 10 .4 Figure 10 .5 Figure 10 A .1 Figure 10 A.2 Figure 10 A.3 Figure 10 A.4 Figure 10 A.5 Figure 10 A.6 Figure 10 A.7 Figure 10 A.8 LIST OF FIGURES AND TABLES Twenty percent volatility stock A graphical view of volatility Monte Carlo probability distributions of stock prices Call and put options Cone of... Table 8A .1 Binomial and Trinomial Results (Basic Inputs) Table 8A.2 Binomial and Trinomial Results (Exotic Inputs) Table 10 .1 Stock Price Forecast from Investor Relations Table 10 .2 U.S Treasuries Risk-Free Spot Rates Table 10 .3 Forward Risk-Free Rates Resulting from Bootstrap Analysis 30 31 33 34 34 35 36 37 37 38 43 44 47 48 56 60 66 70 72 72 10 3 10 4 11 3 11 8 11 8 13 4 13 7 13 8 xiv Table 10 .4 Table 10 .5... Bootstrap Analysis 30 31 33 34 34 35 36 37 37 38 43 44 47 48 56 60 66 70 72 72 10 3 10 4 11 3 11 8 11 8 13 4 13 7 13 8 xiv Table 10 .4 Table 10 .5 Table 10 .6 Table 10 .7 Table 10 .8 Table 10 .9 Table 10 .10 Table 10 .11 Table 10 .12 Table 10 .13 Table 10 .14 Table 10 .15 Table 10 .16 Table A .1 LIST OF FIGURES AND TABLES Generalized Autoregressive Conditional Heteroskedasticity for Forecasting Volatility Volatility Estimates Estimating... Customized Binomial Lattice Results Options Valuation Results Contribution to Options Valuation Reduction Options Valuation Comparison Expense Allocation (BSM) Expense Allocation (Customized Binomial Lattice) Dollar and Percentage Difference in Expenses Scenario Analysis on the Option Results Tables (10 % Annual Forfeiture) 13 9 14 0 14 4 14 5 14 6 14 8 14 9 15 4 15 5 15 6 15 7 15 7 15 7 17 0 Preface his book was written... of options valuation results Options valuation result at $0. 01 precision with 99.9 percent confidence A three-step recombining lattice A two-step nonrecombining lattice The underlying stock price lattice Zero volatility stock 23 24 24 25 26 27 28 29 55 60 61 62 62 63 63 85 86 90 91 xi xii Figure 8.5 Figure 8.6 Figure 8.7 Figure 8.8 Figure 8.9 Figure 8 .10 Figure 8 .11 Figure 8 .12 Figure 8 .13 Figure 8 .14 ... reached via e-mail at JohnathanMun@cs.com Valuing Employee Stock Options PART One Impacts of the New FAS 12 3 Methodology CHAPTER 1 Implications of the New FAS 12 3 Requirements A BRIEF INTRODUCTION In what the Wall Street Journal calls “among the most far-reaching steps that the Financial Accounting Standards Board (FASB) has made in its 30 year history, 1 on March 31, 2004, FASB released a Proposed Statement... Volatility and 5-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates Seventy Percent Volatility and 5-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates 16 9 17 1 17 9 18 7 19 9 Contents Thirty-Five Percent Volatility and 7-Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period,... with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates Thirty-Five Percent Volatility and 10 -Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates Seventy Percent Volatility and 10 -Year Maturity ESOs with Varying Stock Price, Suboptimal Behavior, Vesting Period, and Forfeiture Rates ix 211 227 243 267 Glossary 2 91 Notes 295 . Valuation Results 15 4 Table 10 .12 Contribution to Options Valuation Reduction 15 5 Table 10 .13 Options Valuation Comparison 15 6 Table 10 .14 Expense Allocation (BSM) 15 7 Table 10 .15 Expense Allocation. Points 11 5 Appendix 8A—Binomial, Trinomial, and Multinomial Lattices 11 5 CHAPTER 9 The Model Inputs 11 9 Stock and Strike Price 11 9 Time to Maturity 12 0 Risk-Free Rate 12 0 Dividend Yield 12 1 Volatility. Study 13 3 Stock Price and Strike Price 13 3 Maturity 13 5 Risk-Free Rates 13 6 Dividends 13 6 Volatility 13 6 Vesting 14 0 Suboptimal Exercise Behavior Multiple 14 1 Forfeiture Rate 14 5 Number of Steps 14 5 Results