Valuing Employee Stock Options Through Simulations

Abstract

This article propose a new and flexible approach to obtain the fair value of Employee Stock Options (ESOs) plans using simulations. We adapt the algorithm of Longstaff and Schwartz (2001) to value American options in order to consider common characteristics of ESOs plans like vesting period, departure risk or voluntary early exercise. Moreover, as an example of the flexibility of the simulation approach, we show how to introduce GARCH effects of the ESO in the valuation method and compute the price bias for a hypothetical ESO.