PRICING EMPLOYEE STOCK OPTIONS WITH AN ASIAN STYLE USING A MODIFIED BINOMIAL METHOD: CASE STUDY FROM INDONESIAN ESO

Abstract

Employee stock options (ESOs) refer to call options which are granted by companies to their employees on the stock of the companies. Besides maintaining employees who have high motivation and potential, ESOs also encourage employees to improve the company’s earning and management, and to adjust the employees’ incentive in accordance with the shareholders’ vision. As a form of non-cash compensation, ESO is a cost component which is efficient for small companies to compete with large companies. This paper discusses ESO with a partial average Asian style (average in the validity period of ESO), which is prevailing in Indonesia. The price of the ESO with Asian style is set using the modified binomial method to meet the ESO’s additional characteristics. Numerical experiments are presented in this paper to examine the accuracy of the model and to analyze the sensitivity of the price toward model parameters.