Stock Option / Warrant

An employee stock option, also known as ESO, is a type of right based on the contracts between an employer and an employee. It is granted by the company to its employees as part of the employee's compensation package.

A holder of ESO has the right to purchase a share of the company at predetermined price either at specific period or specific date after vesting period.

Like US GAAP, Japanese GAAP requires companies to recognize compensation cost when share-based payment is arranged. Given the nature of option contract, valuation for ESO is complicated.

Black-Sholes Option Pricing Model

The Black–Scholes Option Pricing model is one of option pricing models, providing the call option price of European option.

In order to calculate option price based on the Black-Sholes model, it needs six factors described in the followings.

         
 
 
   
 
 

 

C Call Premium
S Underlying Asset Value
K Exercise price
σ Volatility
r Risk free rate
T Time in years
q Dividend rate