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A tale of two options: employee reload options and shout call options

Authors Dai, Min
Kwok, Yue Kuen
Issue Date 2003
Summary The reload provision in an employee stock option entitles its holder to receive one new (reload) option from the employer for each share tendered as payment of strike upon the exercise of the stock option. The number of reloads allowed can be finite or infinite. The shout feature in a call option allows its holder to reset the option's strike price to the prevailing stock price upon shouting. We examine the close relation between the employee reload options and shout call options. When the dividend yield of the underlying stock is zero, the value of the employee reload option can be expressed in terms of the price functions of shout call option and forward contract. With infinite number of reloads allowed, the payoff of the employee reload option can be related to the lookback feature of the stock price process. We provide closed form valuation formulas for reload options under different dividend policies of the stock. We also examine the optimal exercise policies of the employee stock options. The behaviors of the critical stock price at which the holder should exercise optimally are shown to depend sensibly on the relative magnitude of the dividend yield, interest rate and volatility.
Language English
Format Preprint
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