<t>"Under these circumstances the complete markets assumption falls apart and you have to fall back on preferences. It's clear to me that the risk-preferences of employees and companies towards their own shares must be riddled with subtleties not easily captured by mechanistic "adjustments" to BS or...

<t>Re illiquidity, Johnny says "the value of the derivative is the present value of the expected value under risk neutral measure regardless of what your counterparty does." Beans says why sell for less than fair value. kr says watch out for big positions. I agree with all this, but I'm trying to le...

<t>Hey, I'm a biased employee owner guy who has a lot of respect for the Wilmott computational ability. What to you think, chosing between these cash, stock, and illiquid option bonuses? As for price I was aware of investment houses failing miserably at selling employee option hedges to firms. A fir...

<t>Ah, but here's how we get a price on illiquid options. Your boss decides to give you a bonus and gives you a choice between Black Scholes of cash, BS shares of stock bonus, BS restricted stock bonus shares that vests in 5 years, one American 5 yr option (immediately vested), or one European 5 yea...

<t>Jaiman, So which is more valuable, and illiquid American call option, or an illiquid European call? Assume no dividends so that BS theory finds early exercise to be a mistake. Does this make the European option more valuable because it protects the owner from making the mistake of exercising earl...

<t>Excellent question. My take, current theory is Black Scholes. Despite the option illiquidity and no early exercise, you can delta hedge by shortselling the underlying and lock in BS as the discounted risk free value. In practice you'll have short selling fees, transaction fees, and interest sprea...

<t>I'll take a longer view.1850 - 1900 - The limited liability corporation. While Marx wasted a century by inventing communism, the corporation enabled investment in risky new endeavors without risk to the remainder of your wealth.1900 - 1950 - the fixed rate, fixed payment mortgage and annuity - br...

<t>Employee option updateI seem to be good at ending discussions on the expensing of employee options. Just got this polite email from FASB. All of the valuation experts that we've spoken with so far have adamantly opposed the use of minimum value because in their view it does not represent the Boar...

<t>I guess not for Enron. Legal opinions? My favorite lawyer joke is that I love living under a "rule of law" where I can read the law and know what I can and can't do. And I love that we are ethical beings and have an innate sense of what's right and wrong. I just wish that sometimes the two would ...

<t>Been having some off line discussions. Looks like we may not agree, but the issues are worth sharing. As Aaron points out a good feature of employee options is motivation and sharing, to that I'll add alignment and teamwork. Hard to price these.Then there is the significant illiquidity of unveste...

<t>Thanks Beans, I have heard about collarring restricted stock. And I agree with you that that shorting you own stock to hedge an option is certainly illegal for all 16B officers of a company and probably illegal for all employees. Also a bad career move to be known to be shorting your stock. But c...

<t>Thanks Beans, You've explained that I don't lose liquidity when my broker lends my stock. Trades are executed immediately, and there is a delay beffore the shares are delivered. This can cause a lot of moving stock in the back room, but my sell waasn't delayed. The borrower may have to deliver th...

<t>Thanks Beans, a 2% per year rent fee would make a big difference in the cost of delta hedging a long, illiquid call, but for 30 basis points the effect would be small. What happens in a sell crunch? Suppose you are my broker and I have a large long position with you in Hiflyer.com. You get a big ...

<t>FDAX, I'm intereted in pricing the illiquidity of employee stock options. Does anyone ever rent long term call options? It seems to me that if i own stock, but rent it to you, I still own the stock, I'm collecting rent, and I've given up my liquidity, because now you've got it. How much is the re...

<t>A pornagrapher and a criminal lawyer? Usually I'm just called a w***e. Now days those who want no option expense have abandoned me. They say the option dilution is fully accounted in the share eqiuivalence calculation in the denominator of EPS. They don't like it when I point out that if you awar...