Employee stock options are effective financial instruments used by firms to compensate, reward and retain their employees. They commonly contain non-traditional features that are not found in other conventional options traded in the financial markets. The reload provision in an employee stock option entitles its holder to receive one new (reload) option from the employer for each share tendered as payment of strike upon the exercise of the stock option. The reload provision may be subject to time or performance vesting requirements. Under the time vesting constraint, the holder is prohibiting from exercising the reload until the end of an initial vesting period. After each exercise of reload, the new reload options are subject to the same time vesting requirement. Under the performance...[ Read more ]

Employee stock options are effective financial instruments used by firms to compensate, reward and retain their employees. They commonly contain non-traditional features that are not found in other conventional options traded in the financial markets. The reload provision in an employee stock option entitles its holder to receive one new (reload) option from the employer for each share tendered as payment of strike upon the exercise of the stock option. The reload provision may be subject to time or performance vesting requirements. Under the time vesting constraint, the holder is prohibiting from exercising the reload until the end of an initial vesting period. After each exercise of reload, the new reload options are subject to the same time vesting requirement. Under the performance vesting constraint, the holder can exercise the stock option only when the stock price has breached some threshold level. In this thesis, the analytic formulas for the fair market value of the employee stock options are derived under the Black-Scholes pricing framework. The pricing models can be formulated as optimal stopping problems, where stopping refers to the premature termination of the original option contract. The analytic properties of the price functions and optimal exercise policies of the employee stock options are explored. The determination of the optimal exercise boundary requires the solution of a non-linear integral equation. Numerical schemes are designed for the numerical valuation of the price functions and the optimal exercise boundary.