Chapter 4: Utility-Based Valuation Methodology

The following sections are included:

• Introduction

• The ESO Valuation Model

  • The employee’s investment problem

  • ESO cost to the firm

• The Employee’s Exercise Policy

  • The free boundary problem of reaction–diffusion type

  • Characterization of the employee’s exercise boundary

  • Effects of parameters on the employee’s exercise policy

  • Numerical solution

• Analysis of the ESO Cost

  • Effects of vesting, risk aversion, and job termination risk

  • Comparison with other models

• Valuation Model with Multiple Exercises

  • The employee’s investment problem

  • The free boundary problem

  • The cost of multiple issues

  • Characterization of the employee’s exercise boundaries

  • The impact of multiple exercises

• Existence of a Generalized Solution