Updates From Today

[Shashank Saggar]

1. How does an executive stock option program work? Why do firms give stock options rather than cash or stock? 

• Stocks given to the executives
• Based on performance
• Aligning stock holders interests with the executives
• Vesting schedule is a way to retain the executives
• 80% cost of the options of the market value
• Voluntary part is forgoing the incentive
• From an accounting perspective, you did not have to put in on your balance sheet back then. This rule changed ~ 2000 and now companies are expected to incur the change on the balance sheet.

2. Is an executive stock option program risky? How does Dell hedge the risks of the executive stock option program? Construct payoff diagrams of the option program and the hedge program that Dell undertakes.

• Dell plans to hedge the potential money required to cover for the 20% additional value executive stocks have though its buy and put options. The caveat is that they assume Dell’s stock price will continue to go up and not leave any room for macroeconomic risks.

3. What is Dell really doing with the call and put transactions? Why is it using puts and calls rather than simpler instruments?

• They want to set a ceiling to the price they would like to have for employee stocks through call options (higher)
• Sale of put options (lower) are bringing in money to offset the call options
• No taxes for the amount of money earned through put options
• Purchasing stocks worth 100M and put options of 2.8M
• Use the single bionomial to calculate the hedging

[pn]

Do we agree that "executive stock option" is the same as "employee stock option" ?

Thanks
Padma

[pn]

The law for expensing the stock options was introduced only in 2005 by FASB.  The case we are analyzing is set in 1996.  So at that point there, options did not appear on any of the sheets for accounting.

Is this right?

Padma

[Suraj Ayinikatt]

I think "Yes" for both however I'm not entirely sure on the stock options expense law & details.

 

Suraj Ayinikatt

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From: pn <pad...@gmail.com>
To: fnc_455_s...@googlegroups.com
Sent: Sun, May 1, 2011 1:52:53 PM
Subject: Re: Updates From Today