Chapter 7: Forward Indifference Valuation of ESOs

The following sections are included:

• Introduction

• Forward Investment Performance Measurement and Indifference Valuation

  • Forward indifference price

  • Forward performance of generalized CARA/CRRA type

• American Options under Stochastic Volatility

  • Exponential forward indifference price

  • Dual representation

  • Risk aversion and volume asymptotics

  • Comparison with the classical exponential utility indifference price

• Modeling Early Exercises of Employee Stock Options

  • The employee’s optimal forward performance with an ESO

  • Numerical solutions

  • Behavior of the optimal exercise policy

• Marginal Forward Indifference Price of American Options

  • Review of the classical marginal utility price

  • The marginal forward indifference price formula

• Conclusion