Here's some news from the real world; the guy on the option desk passing on a quote is not a "head ibanker".
Here's some more news: the guy on the option desk likely does not know how to value a 10 year option for specific individual executive that cannot be sold and of which no others like it in the world exist, and hence the pricing goes right by him and goes up to the higher ups. This screws smaller companies that can't attract the attention of an investment banker to price their option for them. Strangely, this is exactly what the head of NYU's accounting program says. Bottom line: Coke's way of doing things won't work for everybody.
Never gonna be an "ibanker" if you go about making such wild unjustified assumptions, or if you think that linking to a .pdf file is going to impress me. I note with slight amusement that I attended seminars discussing the prepublication versions of three of the papers cited in the work you linked to.
Fortunately, I have no desire to be an ibanker, or any other type of banker. As to your comment about going to the seminars, I'm very proud of you. I can't verify your story in any way, so I'll be generous and just trust you on it.
The paper you link to is actually just about the silliest paper you could have linked to in context. I thought that my ex-colleague Jens Carsten Jackwerth had killed off the absurd "sledgehammer to crack a nut" methodology of trying to suggest that a feedforward neural network might be the best way to price vanilla equity options. In actual fact, there is nothing in the volatility smile which can't be captured by a simple lattice model, and pretty much everyone on earth has given up on the approach you suggest.
This may be true; I don't know who Jackworth is, nor do I know of his work. I also don't know who you are and if he actually has any knowledge of you, but I'll trust you on it. Even still, has he figured out a way to model option values over 10 year periods extremely accurately? If so, why on earth isn't he on a beach in Tahiti?
And your suggestion that executive stock options are typically awarded at deep out-of-the-money prices is simply outright false. In general, executive options are deep *in* the money, subject to performance targets, and would actually be reasonably valued as forward sales of equity in many cases.
Actually, we're both wrong. According to Kevin Murphy from USC, Executive Options are usually granted at the money and have a 10 year time horizon. Interestingly enough, Murphy also notes [summary] [full paper] most underwater executive options are not repriced (probably due to the necessity of getting the repricing past shareholders).
Once more; anyone who can pass auditors' exams can put a value on a stock option which is a better guess than assuming it to be worthless.
This is true, we could certainly get an estimate that is better than throwing darts, but that's not quite enough for a lot of people, especially for the IRS. The IRS doesn't allow for taxes to be based of estimates, and expensing the options when they are issued creates difficulties, not in the least that an option issued at the strike price is actually worth $0.00 on the date that it is issued.
So it "doesn't matter" to you that this treatment would mean that the cost base in 2000 would reflect option grants made in 1998 and subsequent stock market fluctuations?
They're worth $0.00 when they're issued. They may be worth something by the time the option is to be exercised. If they are, the company gets an expense and a tax deduction, and the exec gets his cash and his tax bill, just like wages.
Employee stock options are a loophole in GAAP treatment of contingent liabilities, not a special kind of liability not covered elsewhere!
How are stock options not reflected in the financial statements? Should an exec exercise an option, the company must use earnings to buy stock to give to the guy (or give him treasury stock), which obviously hurts earnings, or they must do a share dilution, which obviously hurts EPS. These activities are plain for anyone who wants to look at the financial statements to see. This, combined with disclosure, is all that is needed to solve the problem.
FASB comments about Contingent Liabilities seem to focus on "estimable" and "probable" changes in finaicial positioning. Are options 10 years out all that estimable? I don't know. Perhaps updating the option values every year thoguh contingent liabilities would work, but I'm still not convinced that such a strategy would make financial statements clearer. I know that disclosure will help a great deal in clarifying a company's financial position without screwing up the IRS and causing double taxation.
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