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Optimal exercise of executive stock options

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Abstract

Valuing executive stock options is a challenging problem, because the standard risk-neutral valuation of those options is not appropriate; the executive is not allowed to trade the stock of the firm, so is not operating in a complete market. As this paper shows, an executive holding many American-style call options on his firm’s stock will optimally exercise the options bit by bit, whereas a risk-neutral valuation of the options would assume that all are exercised at the same time. Comparative statics of the optimal exercise policy show many surprising features.

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Authors and Affiliations

  1. Statistical Laboratory, University of Cambridge, Cambridge, CB3 0WB, UK

    L. C. G. Rogers

  2. Department of Economics, Princeton University, Princeton, NJ, 08540-5296, USA

    José Scheinkman

Authors
  1. L. C. G. Rogers
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  2. José Scheinkman
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Correspondence to L. C. G. Rogers.

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Rogers, L.C.G., Scheinkman, J. Optimal exercise of executive stock options. Finance Stoch 11, 357–372 (2007). https://doi.org/10.1007/s00780-007-0041-9

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  • DOI: https://doi.org/10.1007/s00780-007-0041-9

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