Center for Risk Management Research
New Performance - Vested Stock Option Themes
- Author(s): Chen, An
- Pelger, Markus
- Sandmann, Klaus
- et al.
In the present paper, we advocate two effective non-traditional performance-based stock option schemes: Parisian and Asian executives’ stock option plans. Under a Parisian option scheme, the stock price should have outperformed a certain stock price for a fixed length of time. Under an Asian scheme, the executives’ compensation is coupled with the average performance of the stock price. Both schemes make the manipulation through the executives less likely. In the Parisian scheme, it can be achieved by setting the length of excursion sufficiently long and in the Asian scheme, by requiring the average rate of return of the stock to exceed a relatively high fixed rate of return. We focus on the valuation of these new performance-vested stock options and conduct some numerical analyses based on the valuation formulae we obtain.