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Strategies & Market Trends : Employee Stock Options - NQSOs & ISOs -- Ignore unavailable to you. Want to Upgrade?

To: rkral who wrote (68)	6/17/2002 4:25:46 AM
From: hueyone	Read Replies (1) \| Respond to of 786

Thank you for your further clarification. As I understand it, the Black Scholes model is an attempt to assign a present value estimate to the actual cost upon exercise---which is the difference between market price and strike price at date of exercise. I have never claimed that we should be deducting both the present value estimate of the value of the grant (SFAS 123 Black Scholes) as well as the difference between market and exercise price at time of exercise---if that is what you are implying when you ask me where the second cost should be "added". From the professor: However, even without using cash to repurchase shares there is a foregone cash inflow for the excess of the market price of the stock over the exercise price on the date of exercise. In fact, it is roughly the present value of this excess that a valuation model such as the Black-Scholes model attempts to estimate when assigning a value to stock options on the date of grant. More tomorrow. Best, Huey

To: rkral who wrote (68)	6/17/2002 10:48:29 AM
From: Stock Farmer	Read Replies (2) \| Respond to of 786

Ron, It is far more subtle than you suggest. When an option is exercised there is an actual transfer of assets: a share is created and cash changes hands. This is actual, factual transfer of title. Nobody can claim otherwise. And we know precisely what it costs everybody and what everybody else gains. I call this the "ACTUAL" value. When an option is granted, this future potential economic activity is created. But it does not occur. We could say that value changes hands if we'd like. But what really does change hands? A promise. A piece of paper called an "Instrument of Grant" which details how a future transaction involving transfer of capital might take place. The real value follows later. Is it the conditional promise itself that has value? Or the value that follows later that has value? Think this through very very carefully. Particularly for stock options, which are non-assignable, non transferrable... the only way anybody will get money out of these things is by exercise. So you see that it is fair to claim that there is not any actual economic value transferred on grant. HOWEVER, this doesn't stop us from declaring the option to "have value" and to assign a fair price!!! Because we can legitimately expect that exercise will occur in the future. And we can assign value in the present equal to what we expect the value to be in the future. Indeed, a fair present value wouldn't be any more or any less than what we expect. It would be precisely equal to the estimated future potential economic value discounted to present. Furthermore, if our future forecasting ability was PERFECT, then would there be any difference between the "Actual value" at exercise and the "fair value" at grant? So where you claim that there are two values, indeed there is but one value!!! Measured as it is from two different perspectives, one of which is perfectly accurate but retrospective, and one of which is prospective but prone to error. An entire line of thought flows quite logicly from this realization. But most people fail to get here. John