Faculty Digital Archive

Archive@NYU >
Stern School of Business >
Finance Working Papers >

Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26339

Title: Optimal Exercise of Executive Stock Options and Implications for Firm Cost
Authors: Stanton, Richard
Wallace, Nancy
N. Carpenter, Jennifer
Issue Date: 3-Dec-2007
Series/Report no.: FIN-07-024
Abstract: Options have become a major component of corporate compensation. Their cost to arms depends on the exercise policies of executives who face hedging constraints. This paper analyzes the optimal policy and option cost for an executive with general concave utility. We show analytically how the policy and cost vary with risk aversion, wealth, and dividend, and when there exists a single stock price boundary. We also provide an example with a split continuation region, and numerical results on volatility and beta effects. Option value decreases with risk aversion, increases with wealth and hedging opportunities, but can actually decline with volatility.
URI: http://hdl.handle.net/2451/26339
Appears in Collections:Finance Working Papers

Files in This Item:

File Description SizeFormat
07-24.pdf279.22 kBAdobe PDFView/Open

Items in Faculty Digital Archive are protected by copyright, with all rights reserved, unless otherwise indicated.

 

The contents of the FDA may be subject to copyright, be offered under a Creative Commons license, or be in the public domain.
Please check items for rights statements. For information about NYU’s copyright policy, see http://www.nyu.edu/footer/copyright-and-fair-use.html 
Valid XHTML 1.0 | CSS