In a desperate move to retain top talent, corporations across the country have developed stock option exchange programs where employees can exchange old underwater options for a smaller number of new options at current market prices. Typically, fair values of stock options (surrendered and received) are determined using the Black-Scholes option pricing model. The mathematical equation is:
C = SN(d1) – Xe(-rt)N(d2)
d1 = (ln(S/X) + (r + s2/2)t)/(s√t)
d2 = d1 - s√t
Where C is the theoretical call price, S is the current stock price, N is the cumulative standard normal distribution function, X is the option strike price, r is the risk-free interest rate, t is the time until option expiration, and s is the standard deviation of stock returns.
However, late-breaking research has shown that this model (developed in the 1970s) is only valid for options granted earlier than the year 2000. Fortunately, financial economist Nylon Hole has taken over where Black (and Scholes) left off. Based on Fischer Black’s earlier work and accounting for uncertainty in 21st century market fluctuations, Nylon has introduced an updated option pricing formula. Subject to approval by Wall Street bankers (and their government tools), the new Black-Hole model will be used in most exchange programs. The equation is:
Pg + DCbb + Rg = B-H
Where Pg is grant price, DCbb is the dot.com bubble burst, Rg is the great recession, and B-H is the final value of your stock options. By definition, “B-H” means that employees’ options have been sucked into a black hole of worthlessness and will never escape unless and until there is a change in the fundamental physical laws of the universe.
Hopefully, no-one will be disappointed. The workers know that they helped make their workplaces the great companies they are today, and that feeling should be good enough. The corporate entities combined would like to extend a challenge to all employees: let’s stay focused on what we need to do and just forget about this whole stock option thing. Have faith in the future.
