OPTIONS Lattice Exercise Behavior
The OptionsLatticeEB function in FinTools XL is designed to price and evaluate employee stock options (ESOs) using a lattice model. This method is particularly suited to handling the complexities associated with the exercise decisions of ESOs.
Inputs
Model Number of lattice iterations or nodes: 5 is the minimum and 5000 is the maximum. The optimal number of iterations is calculated using function setting 100
Underlying Price The price of the underlying asset
Exercise Price The exercise price of the option
Value Date The valuation date of the option
Vest Info The vesting date if a single input
Expiration Date The Contractual Term expiration date of the option
Volatility The annualized volatility of the underlying stock price
Interest Rate The prevailing risk-free interest rate expressed as a percentage
Yield Rate The yield expressed as a percentage (dividends or interest yield) from the underlying asset
Lattice Type 2=Binomial lattice, 3=Trinomial lattice
Suboptimal Exercise Factor The Suboptimal Exercise Factor (SOEF) accounts for early exercise of the option contract. An SOEF of 2 assumes that exercise will occur when the share price reaches 2 times the exercise price.A factor of 0 or 1 assumes that no suboptimal exercise will occur prior to the expiration date.
Exit Rate Pre-Vesting The turnover or forfeiture rate prior to vesting. No payoff is assumed for an in-the-money option
Exit Rate Post-Vesting The turnover or forfeiture rate post vesting. A payoff is assumed for an in-the-money option
Outputs
Theoretical Value Theoretical or fair value of an option with suboptimal exercise behavior and exit rates
Expected Term Expected term in years; the average time to payoff using the lattice method
Implied Expected Life Implied expected life in years; may be input to the Black-Scholes model as the time to expiration
Next Optimum Nodes Next optimum number of nodes that fits the tree to the SOEF assumption