TAILIEUCHUNG - Optimal exercise of executive stock options

Bank balance sheets are highly leveraged. The average ratio of total assets to shareholders’ capital is about three for non-financial companies, but it is six times that figure for banking firms. 2 From the shareholders’ perspective, higher bank leverage boosts the return on equity for any given level of bank profits. This, however, imposes higher risk, since leverage also increases the volatility of that return. Indeed, in most advanced economies bank equity prices have been more volatile than those of non-financial companies in the last four decades. 3 We measure leverage as the ratio of total assets to. | 1 Optimal exercise of executive stock options 1 . Rogers Jose Scheinkman University of Cambridge Princeton University AMS 2000 Subject Classifications 60G40 62P05. JEL Classifications G11 C61. KEywORDS Stock option optimal exercise constant absolute risk aversion 1 Introduction. In the absence of frictions if a portfolio strategy replicates the payoff of one unit of a claim an appropriately scaled strategy replicates any amount of the claim. If assets are priced by arbitrage the value per-unit is invariant to the amount of the asset considered. In particular in the case of American claims the optimal exercise time is independent of the amount of the claim that is considered. In this paper we show that this result does not necessarily hold in the presence of portfolio constraints or other frictions. We produce an example in which the absence of short sales leads the holder of an American option on a possibly non-dividend paying stock to exercise parts of his option over time. There has been a lot of interest in the valuation of American type securities with portfolio constraints . Cvitanic and Karatzas 1993 Detemple and Sundaresan 1999 . However in this literature it is assumed that there is a single unit of the derivative securities and one studies the optimal exercise time for that unit. It is implicitly assumed that the optimal strategy is independent of the amount held. To fix ideas we will consider an executive who holds an American-style call option on the stock of his firm we make the realistic assumption that he is forbidden to short sell the underlying stock. For simplicity we will actually assume that the executive also cannot hold the stock although it is obvious that this constraint is not binding. The holder of the option can however exercise parts of the option at any time and deposit the proceeds from the exercise in a risk-free account. Risk-aversion leads naturally to early exercise and because the executive s wealth fluctuates with changes

• Đầu tư Chứng khoán
• Cyclic Nucleotides
• Nucleotide
• Stress Responses
• Stress Induced
• Phytaspase Connection
• Membrane H+ ATPase