descriptionIssue Brief Posted on: 6/23/2009

Underwater Option Exchanges: Ongoing Use of Black-Scholes Formula after Valuing Replacement Options with Lattice Model

Takis Makridis

This Issue Brief discusses the arguments for and against a company being allowed (and potentially even encouraged) to use a lattice model to value replacement options subject to an option exchange without being required to continue using that lattice model to value new at-the-money grants issued by the firm in the future. Competing perspectives related to this issue are discussed throughout the Issue Brief, followed by Equity Methods’ recommendation on the matter.

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