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Title: Valuing employee reload options under time vesting requirement
Authors: Dai, Min
Kwok, Yue Kuen
Keywords: Employee stock options
Time vesting requirements
Reload options
Mathematical models
Issue Date: 2003
Abstract: Upon the exercise of an employee stock option, the embedded reload provision entitles the holder to receive additional units of new options from the employer. The number of units of new options received is equal to the number of shares tendered as payment of strike and the new strike is set at the prevailing stock price. The reload provision may be subject to time vesting requirement, where the employee is prohibited from exercising the reload until the end of an initial vesting period. After each exercise, the new reload options are subject to the same time vesting constraint. In this paper, we present the linear complementarity formulation of the pricing models and construct efficient numerical algorithms that valuate the market value of the employee reload options under time vesting requirement. Also, we explore the analytic properties of the price functions and optimal exercise policies of the employee reload options.
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