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Friday, March 4, 2011

Why option grant dates matter in ESOP pricing.

In SpiceJet's 2009-10 Annual Report, they have disclosed(page 6) that they use Intrinsic value method for finding the fair value of option. So far OK(since BSM model not that sound for equities). But the note is a shocker. 
  • 1,804,884 options granted on October 05, 2009 (‘Grant 2’), value per option as per this Intrinsic value method  was  Rs 24.85
  • 5,422,954 options granted on December 23, 2009 (‘Grant 3’), value per option as per this Intrinsic value method  was  Rs 46.25. 
 Now, intrinsic value for a quoted security IS generally the fair market price. As per the BSE website, the historic share prices for SPICEJET in that period was as below
Month Open Price High Price Low Price Close Price No. of
No. of
Total Turnover(Rs.) * Spread (Rs.)
H - L C - O
October 2009 35.00 42.40 32.40 37.05 92485890 181131 3,519,030,105.00 10.00 2.05 
November 2009 36.90 49.20 33.40 46.80 79011946 178373 3,447,075,951.00 15.80 9.90 
December 2009 47.45 59.40 47.40 56.75 76860494 194337 4,172,800,886.00 12.00 9.30 

Now, the pricing would have been decided before hand. But the intrinsic value(as opposed to merely the market price) would not have changed that dramatically within 2 months. Due to market fluctuations, the option value dramatically rose under the intrinsic value method. While under BSM(Black Scholes Merton) model, this volatility would have been slightly toned down in the pricing formula

Conclusion:- For high Beta stocks(like this one), intrinsic value ESOP valuation may result in casino like ESOp expense figures.

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