Repricing Employee Options

Hi everyone,

I had a question about repricing employee stock options, here it is,

5. Patriot Corp. compensates executives with 10-year European call options which is granted at-the-money. If there is a significant drop in the share price, the company’s board will reset the strike price of the options to equal the new share price. Then, the maturity of the repriced option will equal the remaining maturity of the original option. Suppose σ = 30%, r = 6%, δ = 0, and the original share price is $100. Calculate the following:
a. the value at grant of an option that will not be repriced
b. the value at grant of an option that is repriced when the share price reaches $60
c. the repricing trigger that maximizes the initial value of the option

 

it is black scholes.

OP, for an illiquid company, options may not be the best thing for you or for the employees. perhaps restricted shares plus a ESPP. also, and I don't have the law in front of me, it may make sense to get your broker to set up 10b51 plans for insiders with lots of vested shares if they're going to sell. otherwise the stock could move more wildly around non blackout periods after the market sees insider activity.

side note: that's all theory and most of my employee stock option experience is with execs & founders of larger companies, so usually the market is deep.

another option is: if it's going to move the stock, issue a special dividend to make up for the lost value by shareholders.

 

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