종업원 주식 매입 선택권에 관한 주석

그들의 위험을 헤지하기 : 경영권 스톡 옵션을위한 시장 창출.
Semtech의 Wylie Plummer, Microsoft의 공동 설립자 Paul G. Allen과 CNET Networks의 설립자 Halsey M. Minor는 공통점이 있습니까? 뉴스 보도에 따르면, 그들은보다 다양 화 된 포트폴리오로 이전하기 위해 지난 18 개월 동안 모두 집행 스톡 옵션을 헤지했다. Wharton 연구원은 주식 시장의 최근 변동성과 개인이 보유한 주식의 양을 감안할 때 경영진이 위험을 최소화하기 위해 이러한 조치를 취하는 것은 놀라운 일이 아니라고 전했다.
& # 8220; 많은 관리자에게 다양 화에 이점이 있습니다. & # 8221; Wharton의 회계학 교수 인 David Larcker는 "주식 시장의 합리적인 가격과 최소 거래 비용으로 경영진이 주식 옵션을 판매 할 수있는 잘 작동하는 시장을 갖는 것이 바람직 할 것"이라고 덧붙였다. 주식 시장이 경영진이 소유 한 주식에 대해 이러한 수단을 제공하는 반면, 일반적으로 10 년의 수명을 가진 관리 스톡 옵션에 대한 시장은 현재 존재하지 않습니다. & # 8221;
라커 (Larcker)에 따르면 그건 의미가 없습니다. 관리자가 포트폴리오를 헤지하기 때문에 스톡 옵션 시장을 창출함으로써 왜 도움을받지 못하는 지 묻습니다. & # 8221;
스톡 옵션 폭발.
보상 패키지에 직원 스톡 옵션을 사용하는 것은 지난 10 년 동안 극적으로 증가했습니다. 옵션 패키지는 현재 최고 경영진 수준에서 보상의 가장 큰 구성 요소이며, 옵션 패키지는 저급 직원에 대한 보상 부분이 점차 커지고 있습니다. 옵션 패키지의 장점에 대해 여전히 상당한 논쟁이 있지만 다음과 같은 여러 가지 이점이 있다고 주장됩니다. 옵션은 직원의 임금을 주가 성능에 연결하기 때문에 직원이 주주의 이익을 위해 행동하도록 동기를 부여합니다. 옵션은 종업원들에게 장기간 회사와 함께 머물러야 할뿐만 아니라 선택권의 가득 조건 때문에 의사 결정에 장기간의 지평을 채택하도록 동기를 부여합니다. 옵션 패키지를 통해 회사는 재능있는 직원을 유치 할 수 있습니다. 옵션은 회사가 현금으로 지불 할 것을 요구하지 않으며 옵션은 돈으로 & # 8221; (즉, 부여 일의 주가와 동일한 행사 가격)은 회사가 손익 계산서에 보상 비용을 인식하도록 요구하지는 않습니다.
물론 옵션의 결과는 궁극적으로 미래 주식 가격 성과가 옵션의 행사 또는 보조금, 가격과 어떻게 비교되는지에 달려 있습니다. 따라서 옵션은 매우 위험한 형태의 보상이 될 수 있습니다. 위쪽은 엄청나게 높을 수 있습니다. 가장 높은 임금을받는 중역들의 비즈니스 언론 조사에 나타난 거의 모든 경영진은 큰 보수 나 상여를받지 못한 채 자신의 선택에서 얻은 보수로 인해 거기에 있습니다. 다른 극단적 인 상황에서 많은 옵션 패키지는 옵션이 부여 된 후에 주가가 급락했기 때문에 무의미 해졌습니다. 2000 년 봄 NASDAQ의 많은 회사들도 마찬가지였습니다.
어느 누구도 기업의 주가에 어떤 일이 일어날 지 예측할 수 없으므로, 옵션에 대한 가치를 미리 설정하려고 시도하는 것은 주가 변동에 대한 시나리오의 가능성에 대한 추정치를 기반으로해야합니다. 옵션 보상은 예상 보상 패키지를 평가하거나 옵션을 보유 할 것인지 또는 행사할 것인지 결정하는 것과 같이 직원이 직면하는 많은 결정에 매우 중요합니다. 그러나 직원들은 종종 옵션 패키지를 평가하는 것으로 악명이 높습니다. 예를 들어 주식 시장에서 거래되는 유사한 옵션이 없기 때문에 제한된 주식의 가치를 찾을 수있는 것처럼 옵션의 가치를 간단하게 찾을 수는 없습니다. 즉 공개적으로 거래되는 옵션은 일반적으로 만기까지 매우 짧은 시간을 가지며 대부분의 종업원 스톡 옵션에 포함 된 가득 조건 및 몰수 요건과 같은 공통적 인 제도적 특징을 가지고 있지 않습니다. 또한 옵션 가격 결정 모델은 종업원이 행사 날짜 이전에 옵션 포지션에서 종종 현금화하기를 원할 가능성을 고려하지 않습니다.
나의 주식 옵션은 Money & # 8221; 이제 뭐?
물론 모든 직원은 주식 가격이 행사 가격보다 상승하여 옵션에서 수익을 얻을 수 있기를 원합니다. 그러나 일단 옵션이 돈으로 들어가면 & # 8221; 직원의 위험 노출은 상당히 증가 할 수 있습니다. 특히 주식 가격이 하락하면 직원은 자신의 '페이퍼 게인'을 잃게됩니다. 옵션에는 현재 위험 요소가 있습니다. & # 8221; 직원의 투자 대안은 무엇입니까?
첫째, 직원은 옵션을 보유 할 수 있습니다. 이것은 주주들에게 유익한 것처럼 보일 수 있지만 (직원의 발은 여전히 ​​화재에 처해 있습니다), 이는 실제로 주주의 이익에 해가 될 수 있습니다. 즉, 직원을 위험에 노출 시키면 유익 할 수 있지만 위험이 너무 커질 경우 양측 모두에게 피해를 줄 수 있습니다. 직원들은 주주에 비례하여 극도로 다양한 포트폴리오 (인적 자본을 감안)를 보유하고 있으며, 많은 돈을 투자하고 있습니다. 옵션 패키지는 다양 화의 부족을 더욱 심화시킵니다. 위험에 대한 노출을 줄이기 위해 직원은 개인 자산 포트폴리오를 다변화하기 위해 회사의 자원을 사용하는 투자, 자금 조달 및 운영 결정을 내릴 동기를 부여받을 수 있습니다. Wharton의 회계학 교수 인 Richard Lambert에 따르면, 관리자는 경제적 기대 수익이 낮고 (주주에게는 좋지 않은) 인수를 완료하여 포트폴리오의 위험을 줄일 수는 있지만 미래 현금 흐름의 변동성을 크게 줄입니다 주식 가격 (매니저에게 좋음). & # 8221;
마찬가지로, 관리자는 높은 기대 수익률을 보이는 유망한 연구 개발에 투자 할 수는 없지만 그에 상응하여 높은 위험도 있습니다. 주주들은 위험의 일부를 다양화할 수 있기 때문에이 투자가 매우 바람직하다는 것을 알게 될 것입니다. 반면 관리자는이 같은 투자를 매우 분산되지 않은 포트폴리오로 위험을 차단할 능력이 없으므로 바람직하지 않은 것으로 볼 수 있습니다.
그러한 행동의 예는 실제로 많이 있습니다. 더 설득력있는 실제 일러스트 중 하나는 파산 협상에 있던 소비자 제품 회사입니다. 이사회는 회사를 돌리기 위해 유명한 관리자를 고용하기로 결정했습니다. 이 관리자는 회사 주식에 상당한 개인 투자를했으며 매우 낮은 행사 가격으로 몇 백만 권의 스톡 옵션을 받았습니다. 관리자는 회사의 전략을 개선하고 많은 고위험 자본 투자를 시행했습니다. 수년 만에 투자는 큰 성공을 거두었고 회사의 주가는 이전의 역사적 고점보다 훨씬 높은 수준으로 회복되었습니다.
그럼 불평 할게 뭐야? 관리자는 회사에 상당한 지분 투자를했으며 주가를 높이기위한 투자 결정이 내려졌습니다. 불행히도이 관리자의 주식 및 스톡 옵션이 초기 가치의 여러 배에 해당하면이 관리자의 행동이 위험 추구에서 위험 회피로 바뀌 었습니다. 경제적 성공 후, 이 관리자는 더 이상 주주가 원하는 고위험 고수익 투자를하지 않고 작고 안전한 증분 프로젝트에 집중하기 시작했습니다. 분명히, 이 투자 전략의 변화는 매니저에게 바람직했다. 큰 위험에 노출시키지 않으면 서 그의 매우 다변화되지 않은 포트폴리오의 경제적 이득.
분명히, 초기 주식 투자는 주가를 높이기 위해 관리자에게 상당한 인센티브를 제공했습니다. 그러나 성공 후의이 같은 투자는 이러한 동일한 인센티브를 지연 시켰습니다. 이사회에 제안 된 흥미롭고 (다소 논쟁의 여지가있는) 해결책은이 매니저가 자신의 개인 포트폴리오를 현금화하여 다양 화하도록하는 것이 었습니다. 그의 스톡 옵션을 확인한 다음 새로운 (및 더 높은) 행사 가격으로 다른 옵션 세트를 제공하십시오. 이 예에서 이사회는 관리자가 지나치게 많은 결정을 내리면서 바람직하지 않은 결정을 피하기 위해 사전에 관리자가 다변화하는 것을 도왔습니다. 그의 개인 포트폴리오의 형평성.
주식 옵션을 헤지합니다.
직원의 위험 노출을 줄이는 또 다른 방법은이 위험을 헤지하기 위해 다른 유가 증권에 포지션을 취하는 것입니다. 가장 직접적인 위험 회피는 물론 자신의 주식을 공매도하는 것입니다. 주가가 하락하면 옵션 가격의 하락은 단점 주식으로 인한 이득으로 상쇄 될 것입니다. 당연히 증권 거래위원회 (SEC)는 임원과 이사가 자신의 주식을 공매도하지 못하도록 금지합니다. 그러나 낮은 수준의 직원이이를 수행하는 것은 불법이 아닙니다. 불행히도, 단락과 관련된 거래 비용은 높을 수 있습니다 (예 : 마진 요구).
SEC 규정을 위반하지 않기 위해 관리자는 대문자 또는 고리와 같은 합성 도구 (적절한 SEC 공개)를 사용하여 위험 회피를 구현할 수 있습니다. 예를 들어, 관리자는 행사 가격이 현재 주가 이하인 풋 옵션을 매입 할 수 있고 콜 옵션을 판매 할 수 있습니다 (풋의 구매 자금으로 사용). 주가가 하락하면 직원 옵션의 가치 손실은 (최소한 부분적으로) 풋 옵션의 가치 상승으로 상쇄됩니다. 거래 비용 외에도, 이 전략의 또 다른 단점은 주식 가격이 올라가면 매니저는 (직원 옵션의 이득이 그가 팔린 콜 옵션의 손실로 인해 상쇄되기 때문에) 증가 혜택을받지 못한다는 것입니다.
물론 이러한 위험 회피를 수행하려면 직원이 원하는 만료일 및 행사 가격으로 거래 된 보안을 찾아야합니다. 다시 말하지만, 다양한 종류의 옵션 계약에 대한 시장의 부재로 인해이를 어렵게 만들 수 있습니다. 또는 주식 및 스톡 옵션에 대한 헤징의 일부 형태는 관리자와 다양한 투자 은행간에 직접적으로 발생한다고 추정됩니다. 예를 들어, 관리자는 직접 현금 지불을위한 대형 옵션 보조금 또는 다각화 된 투자 포트폴리오의 성과와 관련하여 향후 지급 약속의 결과를 교환 할 수 있습니다. 이 접근 방식의 문제점은 투자 은행에 지불 된 거래 수수료가 특히 커서 관리자에게 개인적으로 많은 비용이 소요될 수 있다는 것입니다. 더욱이, 이러한 개인적인 헷징 계약의 외부 공개는 (즉, 그러한 거래에 대한 논의는 투자 은행가들 사이에서 공통적이지만 SEC 보고서에서 이러한 거래를 발견하기는 어렵습니다).
스톡 옵션 행사 및 판매.
위험에 대한 노출을 줄이기위한 마지막 대안은 단순히 옵션을 사용하는 것입니다. 물론 옵션이 단순히 주식으로 전환되는 경우 위험 문제는 여전히 남아 있습니다. 그러나 직원이 현금화하더라도이 전략에는 여전히 비용이 있습니다. 특히, 만료일 이전에 자신의 선택을 행사하는 직원은 일반적으로 자신의 선택의 가치 중 상당 부분을 포기합니다. 즉, 거의 모든 옵션 평가 수식에는 옵션의 가치가 옵션의 '본질적인 가치'보다 더 가치가 있다고 명시되어 있습니다. (즉, 현행 주가와 옵션의 행사 가격이 '돈'옵션에 포함 된 경우의 차이)
공개적으로 거래되는 옵션을 사용하면 현금으로 출입하기를 원하는 투자자는 이 형벌을 계속 보유 할 수있는 사람에게 옵션을 판매 할 능력이 있기 때문에이 형벌을받을 필요가 없습니다. 현금을 필요로하거나 (유동성을 이유로) 위험에 노출을 줄이려는 직원이 옵션을 행사하지 않고 시장 가격으로 자신들의 옵션을 회사 나 공개 시장에 팔 수 있다면, 이 비용을 부담하지 않아도됩니다. 물론, 이것이 실현 가능하려면, 동일하고 & # 8221; 옵션에 대해 공정한 가격을 책정하는 옵션.
상장 주식 옵션 시장 확대.
종업원 스톡 옵션과 같은 유가 증권 시장이 제대로 기능하지 못하면 평가 및 위험 감소 전략에 문제가 있습니다. 현재 이용할 수는 없지만 필라델피아에 본사를 둔 금융 컨설팅 회사 인 Economic Inventions LLC는 종업원 스톡 옵션을 헤지하기위한 새로운 접근 방식을 개발하고 있습니다. 금융 컨설팅 회사는 만료되지 않는 콜 옵션 (또는 XPO)에 대한 몇 가지 최근 특허를 얻었으며 곧 주요 교환. 회사는 임원 및 직원을위한 주가 성과 인센티브를 창출하기위한 새로운 수단을 제공 할 스톡 옵션으로 XPO를 설명합니다. & # 8221; XPO는 공개 시장에서 적극적으로 거래 될 것이므로 관리 스톡 옵션을 헤지하는 것이 비용이 적게 듭니다. 더욱이, 거래 된 가격은 옵션 가격을 측정하기위한 명시적인 시장 가격을 제공 할 것이지만 현재 거래되지 않는 경영권 옵션을 가진 추측 일 뿐이라고 그는 덧붙였다.
그러나 XPO와 종업원 옵션의 중요한 차이점 중 하나는 종업원 주식 옵션의 기간이 일반적으로 10 년 인 반면 XPO에는 만료일이 없다는 것입니다. 무한 옵션의 장점은 마켓팅 관점에서 만기일마다 별도의 시장이 필요 없다는 점입니다. 기존 스톡 옵션 프로그램을 수정하여 XPO를 사용하고 관리자가 옵션을 이전 할 수는 있지만 장기 스톡 옵션에 대한 합리적인 시장 가격을 보유 할 수 있으므로 관리자는 스톡 옵션을 적절하게 헤지 할 수 있습니다.
요즘 주식 시장의 비정상적인 불안정성을 감안할 때 & # 8221; Larcker는 위험을 헤지하기위한 새로운 전략의 경제적 이점을 이사회의 보상위원회가 심각하게 고려해야 할 때가 될 것이라고 말합니다. & # 8221;
이 주제에 대한 광범위한 연구를해온 Richard Lambert와 David Larcker는 독자들에게 다음 세 가지 질문에 대한 의견을 나누도록 권장합니다.
자신의 재산을 다변화하기 위해 관리자가 스톡 옵션 중 일부를 (단순히 행사하는 것과 반대로) 판매 할 수 있어야한다고 생각하십니까? 무한 스톡 옵션 (XPOs)에 대한 액체 및 잘 작동하는 시장이 관리자가 다양화할 수있게하는데 유용할까요? 직원 스톡 옵션을 10 년 조건에서 만료로 변경하는 것이 회사에 긍정적 또는 부정적 결과를 가져올 수 있습니까?
이 주제에 대한 의견이나 아이디어를 respondcredit. wharton. upenn. edu의 Richard Lambert와 David Larcker에게 보내주십시오. 모든 의견은 기밀 사항이며 연구 목적으로 만 사용됩니다.
KnowledgeWharton을 인용 함.
개인 용도 :
2017 년 12 월 21 일에 접근했다. knowledge. wharton. upenn. edu/article/hedging-their-risk-creating-a-market-for-managerial-stock-options/
교육 / 비즈니스 용도 :
추가 독서.
Trickle-down Economics가 추가 되었습니까? 아니면 버킷에 드롭입니까?
세류 다운 경제학의 진실은 그것이 매우 복잡한 질문 : 경제에서 조세 삭감이 실제로 어떻게 진행 되는가하는 얕은 방법이라는 것입니다.
조치.
폭스를위한 디즈니의 입찰가가 독점 금지 문제를 극복 할 수 있습니까?
지역 스포츠 네트워크의 우위가 규제 당국을 걱정할 수도 있지만, 전문가들은 디즈니가 콘텐츠 및 직접 소비자 스트리밍에 올바른 전략을 갖고 있다고 말했습니다.
스폰서 콘텐츠.
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중국에서 공동 작업 추세가 시작되고 있습니다. UrWork는 회사가 시장 환경에 적응할 수 있도록 유연한 작업 공간을 제공하는 비즈니스 모델을 통해이 업계의 선구자입니다.
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헛소리와 전화 울타리.
시장의 불확실성과 변동성이있는 경우 일부 투자자는 위험을 줄이기 위해 풋과 콜을 사용하여 헤지로 전환합니다. 헤지 펀드 (hedge)는 헤지 펀드, 뮤추얼 펀드, 중개 회사 및 일부 투자 자문가에 의해서 조장됩니다. 옵션에 대한 입문서는 Option Basics Tutorial을 참조하십시오.
풋 및 콜을 통한 헤지 (heedging)는 종업원 주식 옵션 및 현금 보상의 대체물로 부여 될 수있는 제한된 주식보다 수행 할 수 있습니다.
헷징 대 종업원 스톡 옵션의 경우는 헤징 대 주식의 경우보다 강하다. 예를 들어, 대부분의 주식은 양도 소득세 (있는 경우) 이외의 처벌없이 즉시 판매 될 수있는 반면, 종업원 스톡 옵션은 판매 될 수 없지만 행사되어야하며 주식이 매각되어야합니다. 여기서 벌칙은 남은 시간 보험료와 조기 보상 소득세의 면제입니다.
그러나 표준화 된 행사 가격 및 만료일, 세금 고려 사항 및 기타 문제가 없으므로 직원 스톡 옵션을 효율적으로 헤지하기 위해서는 높은 수준의 전문 지식이 필요합니다.
실용적인 측면에서, 전문가는 어떻게 주식 포트폴리오 또는 종업원 스톡 옵션을 효율적으로 헤지 할 것인가?
[왼쪽과 오른쪽 헤징을 시작하기 전에 옵션의 작동 방식과 거래시 사용할 수있는 최상의 전략을 완전히 파악해야합니다. Investopedia Academy의 초급 과정 옵션은 시간을 들여 헤징을 할 수있는 옵션에 대한 강력한 교육을 제공합니다. ]
위험과 보상을 이해하십시오.
첫 번째 단계는 보유하고있는 주식 또는 종업원 스톡 옵션 포트폴리오 보유의 위험을 이해하는 것입니다. 외환 거래 및 풋이나 종업원 주식 옵션과 같은 옵션은 주식보다 자신이 소유하는 것이 더 위험합니다. 주식에 비해 옵션 투자를 빨리 잃을 가능성이 더 커지며, 옵션이 만료일에 가까워 지거나 돈을 더 많이 사용하면 위험이 증가합니다. 옵션을 사용하여 위험을 줄이는 위험에 대해 자세히 알아보십시오.
다음으로, 현재 가지고있는 직위를 유지하는 것과 관련된 위험에 대해 더 잘 이해한다면, 감소시키고 자하는 위험의 정도를 결정하십시오. 당신은 하나의 주식에 너무 집중되어 있고 그러한 위험을 줄이고 양도 소득세를 지불하거나 직원 스톡 옵션의 조기 행사 비용을 지불하기를 원할 수 있습니다.
당신이 이벤트 후에 놀라지 않도록 헤징에 적용되는 세금 규칙을 이해했는지 확인하십시오. 이러한 세금 규칙은 다소 복잡하지만 때로는 적절하게 관리하면 매력적인 결과를 제공합니다. 종업원 스톡 옵션 위험 회피에 적용되는 특별 세금 규칙이 있으며 이는 헤지 주식에 적용되는 것과 다릅니다.
필요한 초기 거래를 수행하는 방법을 이해했는지 확인하십시오. 어떻게 거래에 참여해야합니까? 시장 주문을하거나 주문을 제한하거나 주가에 연결된 제한 주문을 입력해야합니까? 제 견해로, 풋이나 콜을 거래 할 때 시장 주문을해서는 안됩니다. 주가에 묶여있는 주문 제한은 최고의 종류입니다.
다음으로 거래 비용을 이해해야하며 이는 커미션만을 의미하지는 않습니다. 거래를 시작하기 전에 입찰가와 물가 사이의 스프레드와 과거 거래량과 공개 이익을 고려해야합니다. 당신은 나가기를 원할 때 유동성이 거의 없거나없는 헤지스에 들어가고 싶지 않습니다.
또한 다양한 트랜잭션과 관련된 마진 요구 사항과 이러한 요구 사항이 어떻게 변할 수 있는지 이해해야합니다. 물론 자신이 보유한 100 개의 주식 각각에 대해 1 대 1로 전화를 걸 때, 매각 할 때 수익금을 인출하더라도 마진을 결정하는 것은 간단합니다 (즉, 주식이 귀하의 계좌에 남아있는 경우 여백이 없습니다) 전화. 주식 대 1 대 1 이상의 판매는 조금 더 복잡해 지지만 아주 쉽게 처리 될 수 있습니다. 회사 주식이 없으면 헷징 대 종업원 스톡 옵션이 실제로 마진을 필요로합니다.
다음으로 주가가 움직이고 보험료 침식과 변동성 및 금리가 바뀔 때 포지션을 모니터링하는 데 필요한 시간을 이해해야합니다. 포트폴리오를 헤지하기 위해 사용하는 증권 집합을 다른 증권 집합으로 대체하여 조정을 수시로 원할 수 있습니다.
그런 다음 풋을 사거나, 콜을 팔거나, 둘을 조합해야하는지에 대한 결정이 내려집니다.
마지막으로 어떤 전화가 가장 적합한 것인지 또는 어떤 전화가 가장 좋은 것인지 결정하십시오. 장기 옵션에 대한 자세한 내용은 장기 투자 기대 증권 : "LEAP"을 선택해야 할 때를 참조하십시오.
가장 중요한 결정 중 하나는 통화를 판매하고 풋을 사야 할 때입니다. 프리미엄이 펌프 업 될 때 또는 수입이 풋을 사기에 가장 좋은 시간으로 발표 된 다음 주일 인 경우 수입 발표 직전에 판매 할 가장 좋은시기입니까? 그리고 비싼 전화를 팔고 저렴한 가격의 물건을 사기를 희망하는 옵션의 묵시적인 변동성을 고려해야합니까? 흔히 최근에 발생한 변동성은 일에 일조하고 일부 사람들은 내부 정보를 거래하고 있음을 암시합니다. 한 번에 모든 입장을 헤지하지 않는 것이 더 신중한 접근 방법 일 것입니다.
경영진에게 2 ~ 3 주 후에 많은 양의 옵션이 부여되거나 판매 될 수있는 날에 전화를 판매 하시겠습니까? 경영진 내부자가 위험 회피 대상 위험 증권의 유가 증권을 가지고 무엇을하고 있는지 파악하는 방법을 알고 있습니까? 경영진에게 직원 스톡 옵션과 제한된 주식이 부여되면 다음 달에 주식이 오히려 증가 할 가능성이 훨씬 더 높다는 증거가 있습니다.
헷징은 분명히 장점이 있지만, 잘 생각해야하며 스스로 연습하기 전에이 연습에서 경험이있는 사람의 조언을 구하는 것이 가장 좋습니다.

Forex 촛대는 쉽게 무료 전자 서적 다운로드를 만들었습니다.
이진 옵션 프랑코.
종업원 스톡 옵션 위험 회피에 관한 주석.
SumoBrain 솔루션 회사. 검색 전문가 검색 빠른 검색. 조사 연구 MPEP 2. 직원 스톡 옵션, 법인세 및 부채 헷징. 이 연구는 부채를 발행하는 세금 인센티브에 대한 종업원 스톡 옵션의 두 가지 효과를 탐구합니다. 과세 소득에서 선택권을 공제하면 비 차용 세금 방패가 생겨서 논평을 발표 할 인센티브가 줄어 듭니다. 반대로 주식 부여는 예기치 않은 주식 가격 상승 위험 회피에 대한 요구를 창출하고 회사는 주식 재 매입을위한 차입으로 인한 세금 기반 인센티브를 가지고 있습니다. 채무 금융 기업 법, 규정 및 규칙 법인 소득세 법률, 규정 및 규칙 종업원 옵션 법률, 규정 및 규칙 헤지 금융 법률, 규정 및 규칙. 9 월, 출처 : 회사는 최고 경영진에게 옵션 보조금을 제공 할뿐만 아니라 상급 계급 인 Hall and Liebman 아래 많은 직원들에게 확대했습니다. Murphy, 매년 부여되는 옵션의 가치에 대한 견적은 영업 이익의 옵션 퍼센트에서 약 15 %의 Bear Stearns로 상승하여 상당 부분 커졌습니다. Liang 및 Weisbenner; Schlesinger는 주식 가격이 급등하면서 종업원들이 스톡 옵션 행사를 통해 얻은 이익이 폭발적으로 증가함에 따라 보조금 가치가 크게 성장했다. 조세 목적 상 스톡 옵션 행사로 인한 이익은 실현 시점에 보상 비용으로 처리되며, 보조금이나 행사 중 옵션 비용은 재무 제표에 기록되지 않습니다. 첫째, 현금 임금 대신 옵션을 부여하는 회사는 옵션을 행사할 때까지 보상의 세금 절감을 연기합니다. 보통 옵션이 부여 된 후 4 년에서 5 년이됩니다. 이 기능은 현재 기간에 낮은 세율을 적용하고 향후 헤지 비율이 상승 할 것으로 기대하는 기업에 특히 중요합니다. 코어 및 가이 또한 옵션 기반 보상의 가치는 직원이 옵션을 행사할 때 결정합니다 그 당시의 주식 가격은 모두 회사의 직접 통제 범위를 벗어난다. 이로 인해 옵션 보상으로 인한 세금 절감 효과가 줄어들지 만 회사의 이익과 주가 간의 일반적 상관 관계는 주식 옵션 기반 보상이 회사의 과세 소득의 변동성을 감소 시킨다는 것을 의미합니다. 과세 소득과 예상되는 납세액 흐름을 변경함으로써 종업원 스톡 옵션이 부채 조달 및 자본 구조에 영향을 미칠 수 있습니다. 최근 몇 년 동안 많은 기업들이 운동 소득을 공제하여 과세 대상 소득을 상당히 줄였습니다. 직원들은 소득을 소진하고 한계 세율을 0으로 낮추었습니다. 최근의 연구는 Graham, Lang, Shackelford, 그리고 Kahle과 Shastri는 DeAngelo와 Masulis의 정신으로 옵션 이득 공제의 실질적인 비 부채 세금 차감 NDTS 가치를 강조했다. 그들은 옵션의 형태로 큰 nondebt 세금 방패를 가진 회사가 더 낮은 경향이 있음을 보여 주었다고 주장한다 부채 비율. 그러나 이러한 특성 분석은 부채로 재투자 된 주식 환매를 통해 옵션 교부금의 위험을 회피하는 관행에서 발생하는 부채에 대한 옵션의 상쇄 효과를 고려하지 않았습니다. 일화적인 증거에 따르면 옵션 보조금에 의해 생성 된 적발 된 단기 전화 포지션에 대한 우려는 일부 회사가 예상보다 높은 주가 상승에 대한 노출을 관리하기 위해 여러 헤지 전략에 참여하도록 유도합니다. 주식 재 매입의 일반적인 관행을 포함하는 그러한 계약 중 하나는 동적 델타 헤징 전략으로, Mozes와 Raymar가 주장한 바와 같이 동적 델타 헤징하에 기업은 주식을 매입하고 부여 된 옵션의 수에 비례하여 부채를 발행하고 변경 옵션에 대한 응답으로 포트폴리오를 헤지합니다. 스톡 옵션의 가치. 이러한 헤지 전략은 자체 자금 조달이지만 헤지 포트폴리오의 부채 구성 요소에 대한이자 지급의 공제 가능성은 회사에 대한 추가적인 세금 차폐 가치를 창출하므로 헤지 펀드의 주요 동기가됩니다. 결과적으로 동적 델타 헤징은 한계 세율이 높고 추가적인 세금 방패를 활용할 수있는 기업에 가장 큰 호소력을 갖습니다. 첫 번째 - NDTS 예측은 더 높은 옵션으로 인해 한계 세율이 낮아지고 부채가 줄어들 것이라고 제안합니다. 두 번째 - 역동적 인 헤징 예측은 옵션이 헤지를 유발하여 부채를 증가 시킨다는 것을 의미합니다. 이러한 예측 모두 궁극적으로 스톡 옵션을 한계 세율을 통해 부채에 연결하는 반면, 다른 옵션을 지적합니다. 이 논문은 비 부채 감면 및 헤지를 통한 확고한 부채 결정에 대한 종업원 스톡 옵션의 이러한 반대 효과를 테스트합니다. 이 기간 동안 옵션 이익 차감에서 상당 부분 보상금이 증가했음을 확인합니다. 우리는 옵션이 부채가없는 세금 방패 역할을하여 부채 조달을 줄이지 만, 현재의 한계 세율을 통한 주식 효과는 약하며, 아마 우리 대기업 표본간에 약간의 변동을 반영하는 결과를 반영합니다. 우리는 또한 현재의 한계 세율이 높은 기업들이 세금 보조를받는 옵션 교부금의 헤지 (hedging)에 부합하는 방식으로 부채 조달 및 자사주 매입을 크게 향상시키는 것으로 나타났습니다. 그물에, 우리의 견적은 헤지 옵션으로부터의 부채 금융으로의 부양이 고 세율 회사의 운동 이득을 통한 감소 된 한계 세율로부터의 빚에 대한 영향보다 중요하다고 제안하지만 그 효과는 다른 회사에서 대체로 상쇄됩니다. 두 번째 절에서는 세금을 통한 부채에 대한 옵션의 상쇄 효과와 한계 세율 측정에 관한 문제에 대해 논의합니다. 세 번째 섹션은 우리의 대기업 표본에서 스톡 옵션 활동과 한계 세율 측정을 상세히 설명하고 네 번째 섹션은 부채 금융 및 환매에 대한 옵션의 효과에 대한 경험적 테스트를 제시합니다. 다섯 번째 섹션에는 짧은 결론이 포함되어 있으며 향후 연구 방향을 제시합니다. 따라서 한계 세율 MTR이 다른 기업의 경우 부채 비용이 달라질 수 있으며 수익성있는 기업의 경우 수익성이 낮은 기업 DeAngelo 및 Masulis보다 비용이 낮습니다. DeAngelo 및 Masulisemployee 스톡 옵션의 틀 내에서 기업 부채 정책에 쉽게 영향을 미친다. 옵션 보조금이 많을수록 예상 운동 효과가 높아져 기업의 한계 세율이 낮아질 가능성이 높아진다. 결국, MTR이 낮아지면 부채의 상대 가격이 올라가고, 다른 자본은 자본 구조에서 점유율을 낮 춥니 다. 그러나 스톡 옵션과 부채 정책은 옵션 부여로 인해 헤지 목적으로 다른 채널을 통해 연결될 수 있습니다. 회사가이자 비용을 공제하고 자신의 유가 증권 거래에 과세하지 않기 때문에 Mozes와 Raymar의 주식을 다시 사기 위해 스톡 옵션의 동적 헤지에 참여하는 것이 세금 관점에서 최적 일 수 있습니다. 이러한 거래 전략은 동적 델타 헤징 (dynamic delta-hedging)으로 알려져 있습니다. 델타는 기본 증권의 가치 변동에 대한 응답으로 옵션 가치의 변화를 나타냅니다. 이 전략을 통해 기업은 옵션 보조금의 최종 원가를 예상 보조금 액으로 고정시킬 수 있습니다. 델타 값이 [δ] 인 q 개의 새로운 옵션을 부여하자마자. 시간이 지남에 따라 회사는 옵션의 가치가 증가 할 때 주식을 사 고 옵션이 가치를 잃을 때 주식을 팔고 부채를 상환함으로써 헤지 포지션을 조정합니다. 이 거래 전략은 표준 Black-Scholes 옵션 가격 결정 분석을 모방하므로 자체 자금 조달입니다. 그러나이 전략에 자금을 제공하는 데 사용 된 부채에 대한이자 지급은 세금 공제가 가능하기 때문에 델타 헤징을 통해 회사는 스톡 옵션 발행 비용을 효과적으로 공정 가치 이하로 고정시킬 수 있습니다. 옵션을 부여하고이를 헤지하는 것으로 구성된 기업은 모즈와 레이 마르를 헤지함으로써 생성 된 세금 방패를 회사 옵션의 자기 자금 조달 자회사로 간주 할 수 있습니다. 이에 상응하는 기업 가치의 상승은 스톡 옵션 보조금의 합리적인 근거를 제공합니다 역동적 인 헤지 정책과 함께, 더 높은 부채를 수반 하는가? 주식 환매와 주식 매수 선택권 사이에 긍정적 인 관계가 있음을 입증 한 이전 연구들은 기업이 Kahle 옵션 행사의 희석을 피하려는 욕구에 기인 한 것으로 보았습니다. Weisbenner 또는 배당금 환매를 대체하여 옵션의 가치를 보호하기 위해 Fenn and Liang, Kahle과 Weisbenner는 주식 환매시기를 조사하고 옵션이 행사되기 전에 주식이 환매된다는 증거를 찾지 만 헤징을위한 테스트는 아닙니다. Kahle은 환매가 뛰어난 옵션, 특히 행사할 수있는 옵션과 관련이 있음을 확인하고 Weisbenner는 옵션 행사와 함께 일대일로 괄목할만한 증가를 기록하지만 이전의 옵션 보조금으로 인해 감소한다고 기록합니다. Weisbenner는 옵션이 높은 부채 비율로 이어지는 옵션과 일치하여 더 높은 지불금 비율로 이어지는 것을 보여줍니다. Mozes와 Raymar는 옵션 교부금이나 잔고에 대한 명시적인 데이터가 없거나 옵션 교부금으로 예약 된 주식을 기준으로 미결제 옵션에 대해 프록시를 사용하지만 헤지 지원을 찾습니다. 동적 위험 회피의 이점은 기업의 한계 세율에 직접적으로 비례합니다. 왜냐하면 위험을 감수하는 회사는 한계 세율이 0 인 경우 위험 회피 전략에서 현재 값을 도출하지 않기 때문입니다. This suggests that the positive relationship between debt issuance and stock option grants as well as between repurchases and grants should be concentrated among firms with high MTRs. Thus, both NDTS and dynamic hedging strategies link employee stock options to corporate debt policy through marginal tax rates. However, these two channels point in opposite directions and thus have the stock to confound empirical results. In order to disentangle these effects in the data, we need to give operational meaning to the concept of the marginal tax rate. A key issue is whether the current marginal tax rate is sufficient to characterize the relevant tax rate for debt finance, which often is long-term and generates tax--deductible interest expense over multiple time periods. A single rate would suffice if debt issues were frictionless or if marginal tax rates were invariant over time. Debt issues, however, involve substantial transaction costs of underwriting and rating processes, as well as the danger of inviting additional scrutiny. In addition, although Altshuler and Auerbach found that the tax status of firms is highly persistent over time, it is likely that this persistence has lessened in options years because of increased stock option activity. The uncertain time of realization and considerable volatility of tax deductions from option exercises has allowed even highly profitable firms, such as Microsoft, to have little or no taxable income in some years. Consequently, the appropriate measure of the firm's tax environment may include some expectation of future tax burdens, i. Accounting for the dynamic features of the tax code through loss carrybacks and carryforwards in the computation of MTRs, as in Graham et al. However, by considering only the current MTR, Graham et al. As long as debt adjustment is costly, changes in the future expected MTR will affect the current debt policy. Therefore, we adopt a hybrid approach, which does not restrict the effect of options to the current marginal tax rate. We approximate the effect of stock options on current MTR by adjusting taxable income for contemporaneous option exercises and by incorporating firm net operating loss NOL carryforwards that can influence its MTR dynamically the construction of current MTR measures is described in detail below. We also implicitly allow stock option grants employee affect expected MTR in future periods by including their expected values as a separate explanatory variable. Jointly, these two measures approximate comment effects of stock options on marginal tax rates relevant for debt policy choices. Starting with the largest U. If the option data for a company were not usable because they were not complete, we skipped the firm and continued down the list ranked by market value until we had data for firms. For each subsequent year, we collected new data for the firms already in the sample, but because a number of firms failed or were acquired each year, we supplemented the list to include some of the firms that had moved into the list of largest firms based on market cap. For each firm, we collected data on number of option grants, exercises, cancellations, and outstandings, average grant prices, average strike price for options exercised, and average price of options outstanding. We also collected inputs used to estimate the value of the option grants, including the expected term, expected volatility, expected dividend yield, and the risk-free rate. Balance sheet and income data for our sample of firms are from Compustat. Because we are interested in debt policy, we restrict our sample to nonfinancial firms, and are left with between and firms each year. While our sample size is fairly small, due to the labor-intensive nature of the data collection, the firms in the sample account for a large share of economic activity. In particular, these firms accounted for between 62 and 70 percent of the market value of all U. Similarly, these firms account for more than one-half of all share repurchases by public nonfinancial companies annually. Between 24 and 32 firms each year are in the computer-related technology sector. While this constitutes a small fraction of the total number of tech firms, the firms in our sample represent about two-thirds of that sector's market value. Stock Options Our data indicate that option activity increased dramatically since the mid s, and despite the downturn in the stock market since earlyremained substantial in Table 2. The average rate of option exercises also grew sharply, reaching its peak in before dropping in Option cancellation rates also rose, but not by enough to offset the higher rate of grants, and options outstanding trended up throughout the sample period, reaching 8. Option-based compensation is better characterized by option values, whether at grant or exercise. Conceptually, the value at exercise measures the realized gains to employees and is defined simply as the difference between the market price at the time the option is exercised and the strike price. However, because the k forms do not provide precise data on the gains received by employees from employee exercise of options, we estimate the value of exercises by the difference between a firm's average market price for the year less the average exercise price of options exercised, multiplied by the number of options exercised. The average market price is defined as an average of beginning and end of year stock prices. As shown in Table 2, this portion of the rate of option exercises doubled to 1 percent between and Its complement, the proceeds to the firm from option exercises, was more stable through most of this period. The estimated gains realized from the exercise of stock options for our sample firms, and thus the deductions to corporate taxable income, were substantial. The sharp rise represented dramatic stock price increases for many firms, and was most pronounced for relatively option-intensive tech firms. In contrast, valuation of an employee stock option at the time of grant is perhaps more difficult, and it certainly has been a subject of fierce debate. Many, most notably Financial Accounting Standards Board FASB, argue that models used to price traded options hedging be used to approximate the value of employee stock options provided some adjustments are made to account for their differences with traded options. In particular, employee stock options are non-transferable, which could lead to early exercise of options because holders cannot realize gains by selling their options. FASB also allows firms to reduce option grants by those that are not expected to vest because employees forfeit their options when they leave. For our estimations, we adopt the recommended approach of FASB for non-transferability and vesting. We estimate a value for employee stock options by using a standard pricing model for American options the Barone-Adesi and Whaley analytic approximation. These values are very similar to those provided by the more familiar Black-Scholes estimation method, which is used to price European options. As in other papers, we assume that options are granted at-the-money, the most common practice. The median stock price volatility increased steadily from about 25 percent prior to to 34 percent inand the typical dividend yield fell from 2. In addition, while the median expected time to exercise was five years for nearly every year of the sample, there was substantial variation across firms, mostly between two and seven years. These terms are consistent with previous studies that have found that employees tend to exercise their options early. For our sample, average cancellation rates grew to about 0. Similar to the trend in the number of grants, option values with the FASB-allowed adjustments showed a sharp increase. Measures of Marginal Tax Rates We construct proxies for current marginal tax rates using financial statement data from Compustat and from k reports. Earlier studies have discussed the difficulties of hedging firm tax status from financial statement data. We follow the best-practice advice outlined in Plesko forthcoming and incorporate additional information on option exercises. In the absence of an elaborate simulation mechanism required to accommodate the dynamic features of tax code e. The marginal tax rate is set at the top statutory level 34 percent when the firm has positive taxable income and does not have any NOL carryforwards. The marginal tax rate is set to zero if taxable income is negative and the firm has NOL carryforwards. If only one of these conditions holds, the firm's MTR is set at an intermediate value of 17 percent. As a first step, we compute taxable income as total pretax income Compustat item plus deferred taxes item grossed up by the top statutory rate, less gains realized from option exercises. Following Graham bwe substitute the change in deferred taxes from the balance sheet item 74 if the deferred taxes entry is missing. The exercise gains are estimated from number of options exercised and the weighted average strike price reported on the k filings, which allows us to avoid the problematic figures for "tax benefits from stock options" that some firms report see Hanlon and Shevlin, To determine whether a firm has NOL carryforwards, we attempted to differentiate between carryforwards generated by firm's own net operating losses from others, such as those from acquisitions or operating losses of foreign subsidiaries. As discussed in detail by Mills, Newberry, and Novackcarryforwards from these other sources are often poor indicators of corporate tax status since tax losses of a foreign subsidiary cannot be used to reduce U. Thus, we hand-collected the details of the carryforwards from the financial statements and adjusted for acquisitions and foreign subsidiaries whenever possible. Given our sample of large, mostly profitable firms, this skewness is not surprising. Even so, more than 10 percent of the observations record a ratio of more than 30 percent. When we deduct exercise gains from the sum of pre-tax income and deferred tax assets, the number of observations with net negative taxable income after exercise gains increases slightly from 49 to For our sample, only 40 firm-year observations meet these criteria. At the other end of the stock, firm-year observations are designated as facing the top marginal rate, defined if net taxable income is positive and there are no operating loss carryforwards. The remaining observations fall in the middle. This focus on incremental debt financing, rather than debt hedging, helps us avoid potential endogeneity problems between cumulative debt and marginal tax rates. In particular, firms with high debt levels may generate enough interest expenses to lower their MTR, which could give rise to a spurious negative relationship between marginal tax rates and debt ratios MacKie-Mason, ; and Graham, a. Cumulative debt ratios also reflect debt choices made when a firm faced potentially different tax circumstances. In order to better identify tax stock and hedging effects, we exclude years in which firms undertook significant mergers or acquisitions because such transactions often have a substantial effect on debt structure. As shown in Table 3, firms have been increasing debt at an average rate of about 3 percent of beginning-of-period assets. Figure 2 summarizes the time-series pattern of mean and median changes in debt. Mean changes in debt were relatively higher in to than in the first few years of the sample period; median ratios show greater increases only in and As can also be seen, exercise gains and net option grant values were highest in to These data suggest the link between options and debt financing may reflect more than just the NDTS feature of options, as the average firm in our sample has acquired more debt, not less, as option activity has accelerated. Because firms are more likely to buyback common shares for hedging purposes, as opposed to preferred shares, which are less liquid, we reduce repurchases for redemptions of preferred stock estimated as a substantial decline in preferred equity see Kahle, The mean repurchase yield hedging 1. The 25th percentile indicates that more than one-quarter of the firm-year observations involved no repurchases. This pattern reflects the substantial lumpiness in repurchases--many firms did not buyback shares in every year, though nearly all of the firms engaged in repurchases in at least some of the years of our sample. All firms in our sample granted options, and on average, grants adjusted for expected cancellations were 1. The estimated delta for an option granted at the money averaged about. Thus, firms that adopt a delta-hedging strategy would issue debt and repurchase shares in the amount of [delta. Thus, option grants translated to hedging demands averaged 1. To calculate marginal tax rates, as discussed above, we allow realized option gains to reduce taxable income and, if large enough, the marginal tax rate. For our sample, the median firm faced the top marginal tax rate, while the firm at the 25th percentile faced a lower tax rate, though not zero, designated as 17 percent. We select a set of firms that can be characterized as persistently facing a high marginal tax rate because firms may not greatly alter their behavior in response to short-run fluctuations in tax status. This variable, highMTR, indicates that 38 percent of the firms in our sample faced the top marginal rate in every period. The expected value of options granted but not yet exercised can also affect current marginal tax rates because employee create the possibility that gains realized in the future will create losses that can be carried back. Options not yet granted also can affect future marginal tax rates. We proxy for these two future effects by the estimated value of new option grants, net of expected cancellations. The value of net option grants averaged about 1. Firm characteristics that are relevant to debt policy relate to need and ability to raise debt and investment opportunities. Excess cash flow, defined by operating income before depreciation less capital spending, reflects both need and financial ability to raise funds. Firms with higher excess cash flow are expected to issue less debt. We also include proceeds to the firm from the exercise of options, which represent a source of funds to the firm but do not boost operating income. As in other studies of debt financing, we control for growth options, fixed assets, and size. Growth options are proxied with market-to-book assets Smith and Watts, Firms with more fixed assets, measured by the ratio of property, plant, and equipment to total assets, have comment assets available to secure debt, and thus could raise more debt. Size is measured with sales, and is expected to be positively related to debt, because of its correlation with information availability and access to markets. Changes in Debt, Tax Rates, and Option Grants This section discusses comment results of tests of whether new option grants would increase debt financing through a hedging motive, and whether options through their realized and expected gains lead to less debt financing by reducing current and future tax rates. Changes in debt are regressed on variables that capture hedging motives, effects of future exercises of option grants on expected MTR, current marginal tax rates, and a number of controls. We evaluate two alternative measures for hedging motives--number of option grants and [delta. The latter proxy allows us to introduce heterogeneity on the basis of firm's stock volatility and expected option lifetime, which employee substantially across firms and over time. As shown in column 1 of Table 4, the estimated coefficient on net option grants new option grants adjusted for expected cancellationsis positive and significant. Similarly, the coefficient on the other hedging proxy, net option hedge column 4is positive and significant. These coefficients indicate debt increases are larger at firms that grant more options, consistent with hedging behavior. Comment a key motivation for hedging is the tax savings from the debt, the effect on debt increases should employee greater for firms that face persistently high marginal tax rates. As noted above, we define high MTR firms as those that faced the top statutory tax rate in each year of our sample. As shown in columns 2 and 5the coefficients on the interaction of the high tax status and number of net new grants, or the number required for hedging, are positive and significant. Employee is, firms appear to hedge option grants, and those that consistently face high tax rates hedge by substantially more. Measures of the effects of option grants on marginal tax rates also appear to affect changes in debt. The effects of option grants on expected marginal tax rates are proxied by the expected value of new grants normalized by firm's assets. The coefficient on the value of new option grants is negative and generally significant, suggesting that firms that anticipate large compensation expenses from option grants have smaller debt increases. The relationship is consistent with the hypothesis that option exercises create a large non-debt tax shield that could reduce current tax rates through loss carrybacks or future tax rates by exhausting future comment income. However, we do not find evidence in this sample that a measure of the lagged marginal tax rate has much effect on debt columns 3 and 6 ; this measure is lagged to reflect the firm's MTR at the beginning of the decision period and to alleviate endogeneity concerns. The estimated coefficient, while positive, is not significant, somewhat in contrast to Graham et al. The negative coefficient on exercise proceeds, defined as the amount of funds the firm receives when the employees exercise their stock options, is negative and significant in every specification. Because exercises are effectively a sale of securities to employees at a discount, it is not considered income for tax purposes and does not affect the marginal tax rate. However, the proceeds raise cash flow, and a dynamic hedging strategy would predict that the proceeds would be used to pay down debt to unwind the hedge at exercise. Our results indicate that greater exercise proceeds correspond to smaller increases in debt, consistent with hedging behavior. Other control variables have the expected signs, as in Graham a. Increases in excess cash flow operating income less capital expenditures reduce debt increases, while an increase in fixed plant and equipment is related to stronger debt issuance. An increase in market-to-book ratios, a measure of investment opportunities, is negatively correlated to debt increases. This is consistent with firms using less debt to avoid the underinvestment problem, which is more severe for high growth firms. Finally, the results show that firms with fast sales growth also have greater debt increases, perhaps reflecting greater access to debt markets. Share Repurchases and Option Grants We next examine share repurchases to assess whether firms are buying back shares in a manner consistent with hedging option grants. Because the dependent variable is bound from below by zero, we use a one-sided tobit model to estimate the repurchase regression. As shown in Table 5, column 1the coefficient on net option grants, adjusted for expected cancellations, is positive and significant, as employee the coefficient on the interaction of new option grants and high marginal tax rates. Thus, as we found for net debt finance, firms appear to buyback shares in conjunction with net new option grants, and stock with the highest MTR buyback even more. We find similar results based on a stock of the options needed to initiate a dynamic hedging program column 2. The coefficients on the hedge variables suggest that firms are buying back shares, but by less than would be expected if they strictly followed a dynamic hedging strategy. We address the potential concern that the coefficient on high MTR firms simply reflects high cash flow at the firms by including as a control variable lagged excess cash flow, defined as operating earnings less capital expenditures, which has the predicted positive effect Fenn and Liang, ; Grullon and Michaely, We also find that lagged sales are positively related to share repurchases, and lagged market-to-book is negatively related to share repurchases. Even as the additional amount at firms with high tax rates does not raise the coefficient by enough to make the case that firms are strictly adhering to a formal dynamic hedging strategy, nor do we think that firms follow such a strategy to the letterthere is ample evidence that share hedging are motivated by hedging considerations. When we also add a measure of options outstanding at the beginning of the period, the coefficient, though positive, is insignificant columns 3 and 4. In contrast, both Kahle and Weisbenner found significant coefficients on options outstanding, but neither controlled for new option grants. These results suggest that the bulk of repurchases related to options appears to occur in the same year when the options are granted. This timing is consistent with hedging behavior, because a hedge is most valuable when it is put on before options go into the money. Subsequent purchases of stock in a hedging program are incremental, as the estimated delta starts at a value of about. Moreover, though the passage of time would tend to boost repurchases, price fluctuations in the interim can lead to both purchases and sales of stock. Both Kahle and Weisbenner argue that repurchases are a mechanism to manage dilution from the granting of employee stock options, pointing to studies that suggest that measures such as EPS are important for stock price valuation. Our findings indicate that share repurchases are more closely related to new grants, not outstandings. This finding suggests a motivation for share repurchases that puts less weight on the importance of the number of shares, and is more consistent with classical finance theory of firms protecting their value by hedging exposures to unexpected stock price gains, and with creating value with the tax savings from the additional debt. Robustness Checks Comment section evaluates the robustness of results. One puzzling finding in the previous set of results is the insignificance of the marginal tax rate. A possible explanation is that our sample does not permit enough variation in this rate; indeed, 72 percent of the firm-year observations are designated as high tax rate. In part, this concentration of high tax rate firms owes to our focus on large firms, which tend to be profitable, and also because we hand-collect data on operating loss carryforwards and thus are able to exclude carryforwards from foreign subsidiaries and acquisitions. To explore the possibility that lack of variation can help to explain the weak finding on the current marginal tax rate, we construct a dataset from Execucomp that contains information on more firms, but less rich data on option activity. This data source has been used by a number of studies that have examined option activity see e. Moreover, since we are not able to check the accuracy of NOL carryforward data by hand, we impose data screens suggested by Mills et al. Thus, we trade off precision in estimating the current marginal tax rate and net option grants for a much broader cross section. About 58 percent of the firm-year observations are defined as high tax rate, less than in our original sample. Table 6 presents results for changes in debt based on the larger sample. First, debt increases are higher when options are granted, as in the previous results, consistent with hedging behavior. However, the coefficient on the interaction with high MTR is not significant, suggesting that while debt increases with option grants, the effect is not stronger for the firms with persistently high tax rates. The coefficient on the value of new option grants is negative and significant, suggesting that expected exercise gains could reduce marginal tax rates and temper debt increases. More importantly, we find a strong positive effect of the lagged marginal tax rate on debt changes. These results lend some support to our hypothesis that our lack of significance could derive from inadequate variation in the measured tax rate, though additional work is needed to fully understand this link. The reported results are similar to those based on the sample of all firms. Tobit estimates of share repurchases based on the larger sample are shown in Table 7. Share repurchases are less frequent, and on average, smaller than for the bigger sample. As we found for the previous sample, the coefficients are positive for new option grants and options needed for hedging, though we are not able to control for expected cancellation rates. The coefficient estimates for the option grant and option hedge, each interacted with the marginal tax rate, are also positive and significant. Coefficients on control variables are similar to the previous results, though the negative coefficient on the industry dummy variable for technology firms reaches significance. These results for the larger sample of firms support the hypothesis that firms buyback shares in conjunction with granting options, especially those that face high marginal tax rates, consistent with hedging activity to limit exposures to option options from greater-than-expected stock price increases. Offsetting Effects and Net Implications for Debt Our empirical results identify two offsetting effects of options on changes in debt through the role played by option gains in creating NDTS and hedging demands. The relative magnitudes of these effects are a strictly empirical matter. While it may be difficult to characterize a typical firm for which both effects are important, it is easier to describe two extreme cases. On the one hand, there exist highly profitable firms, for which the chance that their MTRs would be reduced by the NDTS of options is quite small; it is precisely these firms that would increase debt by hedging their option grants and enjoy the current tax savings of interest deductions. In contrast, there are firms for which profits are sufficiently low that it is likely that grants will reduce MTRs and give the firms sufficient incentives not to take on debt. These firms are also likely comment have much weaker incentives to engage in hedging strategies that generate current tax savings such as dynamic delta-hedging. Nonetheless, we attempt to provide some view of the offsetting effects on incremental debt levels. From Table 4, column 1estimates indicate that the stock effect on changes is debt is: The first two effects reflect hedging behavior and the third effect reflects the reduction in MTR from an increase in option grant values. Firms that currently face a high MTR and would gain the most by hedging will, on net, increase debt as a result of options. To see this, the first two effects indicate that an increase in net grants will raise incremental debt by 0. At the same time, however, the increase in the net value of option grants raises the hedging of reducing MTRs. This offset is relatively small, especially because option values times shares outstanding are less than assets. Given a mean median value of. Nonetheless, the expected net effect on debt is still positive. In contrast, the effect of options on debt changes is more ambiguous for firms that are not classified as high MTR. An increase in net grants would increase the incremental debt of such firms by only. While we have too few firms in our sample that consistently face a low MTR to conduct a meaningful comparison and they have a low MTR for a wide range of reasons, ranging from start-ups to approaching bankruptcythese firms are the least likely to be concerned with tax benefits of hedging, and thus the effect on debt change would be simply captured by the third effect. For these, we would expect that employee reduce debt because of the NDTS benefit. That is, these firms do not benefit from the NDTS because their taxable income before deducting exercise gains is too large. These results are roughly consistent with our results for high MTR firms, though we identify another channel through which options may influence debt policy. The first channel functions through the non-debt tax shields from the realization of option gains that can exhaust taxable income, reducing a firm's marginal tax rate, and new grant values that raise the possibility of this event in the future. At the same time, the tax deductibility of interest payments on debt provides firms an incentive to hedge their option grants with a strategy of repurchasing shares and issuing debt in proportion to the options granted. We find supporting results for the role of options as a non-debt tax shield through the expected marginal tax rate, but effects through the current marginal tax rate are weaker. Results for a broader cross-section of firms, but for which option data are less precise, suggest that expanding the data set to get more variation in the tax rate could help to more precisely identify the effect through the current marginal tax rate. We also find strong evidence of hedging behavior for firms that face high marginal tax rates, and thus most able to benefit from the tax savings, though the coefficient estimates do not indicate a strict adherence to a dynamic hedging strategy. These effects, nonetheless, are significant, and indicate that option grants increase debt issuance. Using our coefficient estimates, we construct a simple illustration of the two effects of option grants and show that for high tax rate firms, the effect on debt through hedging more than offsets the reduction in debt from reducing expected marginal tax rates. Our resuits also suggest a link between share repurchases and option grants, which, contrary to the desire to offset dilution, is more consistent with classical finance theory of firms protecting their value by hedging exposure to unexpected stock price gains and creating value by options additional tax shields. Acknowledgments The views expressed in this paper are those of the authors and not necessarily those of the Comment Reserve Board. We would like to thank our discussant, Matt Knittel and Steve Sharpe for insightful comments. We thank Darrell Ashton, Tom McAndrew, and Lizy Mathai for excellent research assistance. All remaining errors are our own. Based on information from Jacquette et alwe would expect that our estimates of gains would be overstated by between 5 and 10 percent. However, because we have no information on the cross-sectional variation in types of options, we treat all options as non-qualified. In this paper we assume that firms effectively face two marginal tax rates percent if they have no taxable income and 34 percent otherwise. That is, in selling their labor services the employees value the stock option using a standard Black-Scholes model. In this case, stock-option issuance becomes a pure tax arbitrage and one needs to introduce new modeling features to prevent firms from paying for their labor services exclusively with stock options. By locking in the cost of an option grant, dynamic hedging appears to reduce this benefit. However, in evaluating the benefits of dynamic hedging one needs to consider the tradeoff between an increase in the level of taxable income via a reduction in labor costs through hedging and a reduction in its volatility via unhedged option grants. If such gains do not occur within the next two years, the firm will not be able to carry back those losses, and so its current MTR will remain at the options rate. When prices rise, employees may exercise their options to rebalance their portfolios since they cannot just sell them Kulatilaka and Marcus, This negative correlation between stock price returns and life of the option would lead to option values lower than ones that simply adjusted for an average expected option term. On the other hand, employees may be less likely to leave a firm when prices rise, leading to higher option values than one based on past departures Cuny and Jorion, ; Jennergren and Naslund, However, for a sample of employees at five firms, Huddart and Lang found the average time to exercise was less than four years, and Carpenter found for a sample of executives at 40 firms that the average time was 5. Core, John, and Wayne Guay. DeAngelo, Harry, and Ronald Masulis. Fenn, George, and Nellie Liang. Graham, John, Mark Lang, and Douglas Shackelford. Grullon, Gustavo, and Roni Michaely. Houston, TX and Ithaca, NY: Rice University and Cornell University, Hall, Brian, and Jeffrey Liebman. Hanlon, Michelle, and Terry Shevlin. Huddart, Steven, and Mark Lang. Options, Futures, and Other Derivatives. Upper Saddle River, New Jersey: Jacquette, Scott, Matthew Knittel, and Karl Russo. Office of Tax Analysis, Department of Treasury, Peter, and Bertil Naslund. Open Market Repurchases and Employee Options. Kahle, Kathleen, and Kuldeep Shastri. University of Pittsburgh, September Kulatilaka, Nalin, and Alan J. Liang, Nellie, and Scott Weisbenner. An Analysis of Stock Option Grants and Stock Prices. Mills, Lillian, Kaye Newberry, and Garth Novack. Modigliani, Franco, and Merton H. Mozes, Haim, and Steven Raymar. A Tax Motivation and Empirical Tests. What Role do Stock Options Play? Share repurchases are, repurchases of common stock Compustat share repurchases adjusted for declines of preferred stock. Percent of nonfinancial corps is the value for the sample firms as a fraction of the value for all U. TABLE 2 EMPLOYEE Stock OPTIONS Options SAMPLE Hedging Number hedging options percent o shares outstanding Grants 1. Option data are collected from company k reports. Ratios are weighted by market value. Employee gains are estimated as the difference between market price, proxied with the grant price of options in that year, less the strike price multiplied by the number of options exercised. Proceeds to firm are the strike price multiplied by the number of options exerised. Financial data are from Compustat. See text for variable definitions. The dependent variable is changes in debt relative to beginning-of-period assets. Excess cash flow, fixed assets, market-to-book, and sales are annual changes, and the marginal tax rate is lagged. All regressions are estimated with year dummies and industry dummies for tech, utilities, and other. The dependent variable is repurchases of common stock relative to beginning of period market value. Excess cash flow, market-to-book assets, and log sales are lagged values. Option grants are derived from options granted to top executives divided by the share granted to all employees. Excess cash flow, fixed assets, market-to-book assets and options sales are annual changes and the marginal tax rate is lagged. All regressions were utilities, and estimated with year dummies and industry dummies for tech, other. Royalties for intracompany sales of fancy trademarked cheese.
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Comment on hedging employee stock options

This application claims priority to and the benefit of U. S. Provisional Patent Application No. 60/285,660 filed on Apr. 20, 2001.
BACKGROUND OF THE INVENTION.
Individuals may have a substantial portion of their net worth concentrated in their company's stock, either through direct common stock holdings or derivatives such as employee stock options. Tax and regulatory restrictions have generally left few economically efficient alternatives for holders of these equity positions to diversify their risk. These restrictions are most onerous for holders of employee stock options seeking to generate additional income and/or manage the risk associated with the issuer/employer's common stock.
Presently, unlike freely tradable shares of stock, employee stock options are generally not transferable and most significantly do not have margin value. Therefore, investors hedging employee stock options by selling listed equity options, such as call options, are required to post other acceptable collateral to meet margin requirements (discussed in further detail below).
In addition, US tax law generally prevents individuals from hedging their employee stock options. Specifically, if the stock underlying an employee stock option appreciates after an individual hedges, employee stock option gains are ordinary in character and corresponding hedging losses are generally capital. Because capital losses cannot offset the tax on ordinary income, the losses are deferred unless the individual has capital gains from other investments.
SUMMARY OF THE INVENTION.
The present disclosure creates an efficient process, from both a regulatory and tax perspective, for individuals to hedge employee stock options. First, the present disclosure provides that no margin is required for a listed call option written on an equity security when the account holds a “long” position in a vested employee stock option which can be immediately exercised without restriction (not including the payment of money) to purchase an equal or greater quantity of the security underlying the listed option provided that the vested employee stock option does not expire before the short listed call option, and provided that the amount (if any) by which the exercise price of the vested employee stock option exceeds the exercise price of the short listed call option is held in or deposited to the account.
Second, the present disclosure makes it possible to treat the return on a listed option or over-the-counter option hedge of vested or unvested employee stock options as ordinary instead of capital, thus avoiding the mismatch with the employee stock options' ordinary return and the potential capital loss on the listed option or over-the-counter option hedge. This disclosure treats any losses arising on a closing transaction with respect to the short call option as ordinary losses, provided the optionee makes a valid hedging election pursuant to Internal Revenue Code Section 1221 (a)(7).
Derivative Security Utilized to Hedge.
A derivative security (e. g., a future, option, forward, or swap) is a security whose value depends on the value of an underlying asset or variable (e. g., the value of a stock option is based in the valuation of the underlying stock to which it refers). Derivative securities, such as futures and options, are now actively traded on many different organized exchanges (e. g., the Chicago Board Options Exchange, the Chicago Board of Trade, the International Securities Exchange, and the American Stock Exchange), while other derivative securities, such as forwards and swaps, are regularly traded outside of exchanges by financial institutions and their corporate clients in what are referred to as over-the-counter markets.
Financial institutions, as well as individual investors, dealing with options or other derivative securities are primarily concerned with hedging the risk of adverse price and market fluctuations, which may affect their potential returns and/or positions in the underlying asset. Specifically, many financial institutions and individuals utilize listed option and/or over-the-counter option hedging strategies for the following reasons:
Liquidity—to generate additional income from an existing equity position and create a measure of downside protection.
Risk Reduction—to reduce or eliminate exposure to underlying stock depreciation and protect the value of the equity position.
Diversification—to reduce the risk of a concentrated equity position by investing in a more balanced, diversified portfolio.
Monetization—to increase liquidity by borrowing money using a protected equity position as collateral.
Tax Deferral—to avoid triggering a taxable sale of the underlying position; therefore, the capital gains tax associated with an outright sale of the securities is deferred.
Over-the-Counter Options Versus Listed Options.
In general, an option is a contract giving the holder the right, but not the obligation to buy (call) or sell (put) a specified underlying asset at a prearranged price at either a fixed point in the future (European style) or at any time up to maturity (American style). Options are sold both over-the-counter (“OTC”) and on organized exchanges. OTC options are privately negotiated contracts executed outside of the regulated exchange environment. Additionally, there is no central marketplace or clearing house for OTC options. Market-makers, primarily large investment banks and commercial banks, create OTC options for use by a wide range of corporate, individual, and institutional end-users. In contrast, listed equity options trade on organized exchanges. Listed options typically have standardized strike (exercise) prices, maturities and exercise and settlement features. Unless otherwise specified, the options discussed herein are listed options to purchase or sell stock, rather than other options, such as OTC options, index options, foreign currency options, or interest rate options.
Listed options are issued, guaranteed and cleared by the Options Clearing Corporation (“OCC”). The OCC is regulated by the Securities and Exchange Commission and has received a “AAA” credit rating from Standard & Poor's Corporation. The “AAA” credit rating corresponds to the OCC's ability to fulfill its obligations as counter-party for all listed options trades. The OCC is owned proportionately by the exchanges where listed options trade. The OCC acts as the third party in all listed option transactions and buyers and sellers deal directly with the OCC rather than with each other. The OCC is obligated to the buyer of a listed option contract to ensure that the seller performs in accordance with the terms of the contract and will, in turn, hold the seller's broker-dealer liable for performance on the contract. Listed option contracts are considered to be new issues of securities and are subject to the prospectus requirements of the Securities Act of 1933.
두 가지 기본 유형의 옵션, 호출 옵션 및 입력 옵션이 있습니다. A call option gives the holder the right to buy 100 shares of the underlying stock from the seller by a certain date for a certain price. If the holder exercises this right, the seller of the call option is obligated to deliver the stock at the predetermined price per share. A put option gives the holder the right to sell 100 shares of the underlying stock to the seller by a certain date for a certain price. If the holder exercises this right, the seller of the listed put option is obligated to buy the stock at the predetermined price per share. The exercise price, also called the strike price, is the price at which the buyer may buy stock from the seller (in the case of a call option) or sell stock to the seller (in the case of a put option).
Components of Listed Equity Options.
A listed option contract is described by the name of the underlying security, the expiration month, the exercise price, and the type of option. The premium represents the market price of the listed option.
For example, a listed call option on IBM stock with an exercise price of $50, a October expiration, and a $4 premium would appear as follows:
Each listed equity option represents 100 shares of the underlying stock. In the example above, there are 100 shares of IBM stock underlying the listed option contract.
Expiration of Listed Options.
In accordance with the standardized terms of their contracts, all listed equity options expire on a certain date, called the “expiration date.” The holder of the listed option has the right to buy or sell the underlying stock at any time until the expiration date. If the listed option has not been exercised prior to expiration, it will cease to exist. In the example above, the buyer may purchase 100 shares of IBM stock from the seller until the expiration date in October.
All listed equity options expire at 11:59 pm EST, on the Saturday following the third Friday of the expiration month. Although the listed equity option does not actually expire until Saturday, customers must initiate their right to buy (in the case of listed call options) or sell (in the case of listed put options) the underlying stock by 5:30 pm EST, on the third Friday of the expiration month. An expiring listed option will cease trading at 4:02 pm EST on the day prior to expiration. A listed equity option that has not been exercised by 11:59 pm EST on the Saturday following the third Friday of the expiration month will expire and become worthless. In order to prevent inadvertent expiration of in-the-money options, the OCC will automatically exercise an option for a customer if the option is in-the-money by ¾ point or more and for a member firm if the option is in-the-money by ¼ point or more.
It is important to note that the stock may trade above the listed call option's strike price at any time during the life of the listed call option and the listed call option is not automatically exercised. Likewise, the stock may trade below the listed put option's strike price at any time during the life of the listed put option and the listed put option is not automatically exercised.
On occasion buyers do exercise listed equity options before the expiration date, usually only to capture a large dividend on the underlying stock. It is primarily at the expiration of an in-the-money listed equity option that the seller of a listed equity option needs to be concerned about being assigned.
The exercise price, also called the strike price, is the price at which the buyer may buy stock from the seller (in the case of a listed call option) or sell stock to the seller (in the case of a listed put option). In the example above, the buyer is guaranteed a purchase price of $50 per share for IBM stock, regardless of how high the price of IBM may rise. The aggregate exercise price may be found by multiplying the exercise price by the contract size. The IBM October 50 call has an aggregate exercise price of $5000 (100 shares*$50).
In, At, and Out-of-the-Money.
The relationship between the strike price of a listed option and the current market price of the underlying security has a great influence upon the value of a listed option contract.
A listed call option is in-the-money if the market price of the stock is higher than the exercise price of the listed call option.
A listed call option is at-the-money if the market price of the stock is the same as the exercise price of the listed call option.
A listed call option is out-of-the-money if the market price of the stock is lower than the exercise price of the listed call option.
A listed put option is in-the-money if the market price of the stock is lower than the exercise price of the listed put option.
A listed put option is at-the-money if the market price is the same as the exercise price of the listed put option.
A listed put option is out-of-the-money if the market price of the stock is higher than the exercise price of the listed put option.
The premium is the market price of a listed option at a particular time. It is paid by the buyer to the seller for the rights conveyed by the contract. The potential loss to the buyer of a listed option can be no greater than the initial premium paid for the contract, regardless of the performance of the underlying stock. This allows the investor to control the amount of risk assumed. On the contrary, the seller of a listed option, in return for the premium received from the buyer, assumes the risk of being assigned if the contract is exercised.
The premium is the only component of the listed option that is not standardized. It is determined on the floor of the exchange between buyers and sellers.
Customers purchasing securities may pay for them in full or borrow a portion of the purchase price from the broker-dealer. The amount borrowed from the brokerage firm represents the customer's debit balance. The amount the customer is required to deposit is known as margin. Purchasing securities on margin allows investors to leverage their investments. Leverage involves the ability to increase return with increasing investment.
The extension of credit by a broker-dealer to a customer is regulated by the Federal Reserve Board under Regulation T of the Securities Exchange Act of 1934. Accordingly, option contracts are subject to the margin requirements set forth by the Federal Reserve Board under Regulation T. Regulation T mandates that margin requirements for options are specified by the rules of the registered national securities exchange authorized to trade the option, provided that all such rules have been approved or amended by the Securities and Exchange Commission. Option contracts are also subject to the maintenance requirements of the organized exchanges and each brokerage firm.
It is important to note that under Regulation T, option contracts have no loan value and cannot be purchased on margin. Accordingly, buyers of options must deposit the full purchase price, whether an option is bought in a cash account or a margin account.
Covered Versus Uncovered Call Writing.
The writer or seller of call options may be classified as being either covered or uncovered (also referred to as “naked” call writing). The covered call writer owns the stock underlying the option (or a security convertible into the underlying stock, an escrow receipt, or a long warrant) and is not required to make a margin deposit (e. g., the stock, escrow receipt, convertible security or warrant is considered cover in lieu of the margin otherwise required on a short listed call option position). In addition, covered writing may be done in a margin account or a cash account. The uncovered writer does not own the underlying stock and must meet the short listed call option margin requirement. The basic margin requirement for an uncovered call or put option is the current premium plus 20% of the current market value of the underlying stock minus any amount that the contract is out-of-the-money. Uncovered writing transactions must be done in a margin account.
Covered call writing is less risky than uncovered call writing because if the option is exercised, the investor does not have to go into the market and purchase the underlying stock. The covered writer will simply deliver the shares already owned. The disadvantage to this strategy is that by agreeing to sell the stock owned at the option strike price, the covered call writer forfeits the opportunity to make an unlimited profit if the stock's price advances. Also, the writer of a covered call is still exposed to loss if the market price of the underlying stock declines. In contrast, uncovered call writing is considered to be the riskiest option strategy because an uncovered call writer is exposed to unlimited risk. If the buyer exercises the call, the writer is obligated to deliver the underlying stock. Since the uncovered writer does not own the stock, the investor must first purchase it in the marketplace at the current market price. There is no limit as to how high the price may rise.
Most option exchanges use a market maker system to facilitate trading. A market maker for a certain option is an entity (person or computer program) who will quote both a bid and an ask price on the option when requested to do so by a broker. The bid is the price at which the market maker is prepared to buy and the ask is the price at which the market maker is prepared to sell. The ask is higher than the bid and the amount by which the ask exceeds the bid is referred to as the bid-ask spread. The exchange sets limits for the width of the bid-ask spread. Market makers provide liquidity so buy and sell orders may usually be executed at some price without any significant delays. The market makers themselves make their profits from the bid-ask spread.
Regulatory Disclosure—Employee Stock Options and Margin.
Under current margin regulations and practice, employee stock options are not considered cover in lieu of the margin required for a short-listed call option position. However, requiring no margin on the writing of listed calls against vested employee stock options dovetails with current margin practice in respect of writing call options versus long warrants and escrow agreements (e. g., long warrants and escrow agreements may be utilized as cover in lieu of margin for purposes of establishing a short call option position).
For example, margin is not required for a listed call option written on an equity security when the account holds a net long position in a warrant which can be immediately exercised without restriction to purchase an equal or greater quantity of the security underlying the option provided that the warrant does not expire before the short call and provided that the amount (if any) by which the exercise price of the warrant exceeds the exercise price of the short call is held in or deposited in the account.
A warrant is an instrument issued by a corporation giving to the holder the right to purchase the capital stock of the corporation at a stated price either prior to a stipulated date or at any future time. Warrants are similar to employee stock options in that they are both instruments that give their holders the right to buy a specified amount of stock at a specified time for a specified price. Further, warrants are oftentimes granted in a compensatory context in which they are not traded and are limited in transferability, thus employee stock options are essentially the equivalent of warrants.
Presently, unlike freely tradable shares of stock, employee stock options are generally not transferable and most significantly, do not have margin value. Unvested employee stock options are not marginable for the following reasons. If the employee stock options are not exercisable due to vesting (i. e., unvested), the investor has unlimited risk if the stock increases above the strike price of the listed call option. If the listed call options are exercised (assigned), the seller will be obligated to deliver the shares underlying the transaction. If the investor does not own the underlying stock or cannot exercise employee stock options to acquire the stock, the investor will need other assets to settle the obligations. The investor's exposure will increase as the stock price appreciates.
This risk can be reduced if the employee owns vested employee stock options that are currently exercisable. For margin purposes, a holder of vested employee stock options that can be exercised into freely tradable stock, should be treated as if he or she is “long” the underlying stock. Therefore, investors hedging employee stock options by selling listed equity options, such as call options, are required to post other acceptable collateral to meet the margin requirements, generally cash. The margin requirement is based on the value of the underlying stock and the strike price of the option. In the case of a call option, the investor is required to post additional margin if the underlying stock price rises. Accordingly, while posting the margin necessary to engage in these transactions is not an obstacle for high-net-worth individuals, it is a very large barrier for those deemed “paper rich, cash poor,” as these individuals usually do not have the cash necessary to meet margin requirements. Below is an example of the way in which these transactions are effected today.
For example, in September 2000, Employee holds 10,000 fully vested employee stock options with an exercise price of $50 per share and the Issuer/Employer's stock is currently trading at $100 per share.
In September, Employee, utilizing only 1000 of his or her fully vested employee stock options, sells (writes) 10 November calls with a strike price of $120 for $5 each, thereby allowing employee to collect $5000 in premium from the sale of the 10 listed call options. Prior to entering into this transaction, Employee deposits into his or her brokerage account the margin necessary to enter into the transaction. Minimum margin requirements are currently imposed by the Board of Governors of the Federal Reserve System, the options markets and other self-regulatory organizations. Higher margin requirements may be imposed either generally or in individual cases by the various brokerage firms. To enter into the above transaction, Employee must deposit approximately $25,000 ($25,000=20% of current value of underlying stock (1000 shares *$100)=$20,000+premium ($5000)) of margin into his or her brokerage account. Further, if the underlying stock price rises, the Employee may have to post additional margin.
Once the transaction is executed, Employee collects $5000 in premium from the sale of the 10 listed call options.
If, at the listed option expiration on the third Friday in November, the stock is trading above $120, the 10 listed call options are assigned and Employee immediately submits “cashless exercise” instructions to his or her broker to exercise 1000 of his or her employee stock options into 1000 shares of Issuer/Employer's stock.
Accordingly, 1000 of Employee's employee stock options are exercised at a price of $120 on a “cashless exercise” basis pursuant to the Employee's instructions. The broker-dealer delivers to the Issuer/Employer the amount of money necessary to fund the employee stock option exercise. Once the broker-dealer has received the proceeds of the sale on settlement date, a portion of the proceeds from the sale of the stock is used to pay back both the monies advanced by the broker-dealer to the Employee to effect the exercise of the employee stock options as well as the brokerage commission due. The remainder of the proceeds are paid to the Employee.
Alternatively, if at the listed option expiration on the third Friday in November, the stock is trading below $120, the listed options expire worthless, the Employee retains his or her employee stock options, keeps the $5000 collected in premium and the transaction closes.
Regulatory Disclosure—Vested Employee Stock Options as Margin.
According to an illustrative embodiment of the invention, no margin is required for a call option written on an equity security when the account holds a “long” position in a vested employee stock option that can be immediately exercised without restriction (not including the payment of money) to purchase an equal or greater quantity of the security underlying the listed call option provided that the vested employee stock option does not expire before the short listed call option, and provided that the amount (if any) by which the exercise price of the vested employee stock option exceeds the exercise price of the short listed call option is held in or deposited to the account.
In accordance with an embodiment of the invention, customers are permitted to sell listed call options on the same underlying security as their vested employee stock options without the requirement of margin. To engage in these transactions, however, certain documents by and between the broker-dealer, the customer, and the issuer/employer must be in place. Collectively, these documents guarantee that the broker-dealer has control over the vested employee stock options, and thus the delivery of the corresponding stock, if and when exercise of the employee stock options is deemed necessary. In addition, issues such as forfeiture, pledging and transfer restrictions and non-standardization of employee stock option plans are mitigated through representations made by the issuer/employer and customer in these documents.
In one embodiment of the invention, prior to the sale of any listed call options in the customer's brokerage account, the following documents will be in place. In one document, the broker-dealer obtains a properly executed exercise notice from the customer. This notice contains instructions to the issuer/employer to deliver the stock in good deliverable form to the broker-dealer or its agent no later than three (3) business days after receipt of the employee stock option exercise notification. Through this document, the customer instructs the broker-dealer to submit the notice to the issuer/employer, on the customer's behalf, if and only when the listed call options are assigned. In another document, the broker-dealer has an agreement in place with the issuer/employer, wherein the issuer/employer agrees to accept the employee's (e. g., the customer) properly executed exercise notice from the broker-dealer and deliver the corresponding stock in good deliverable form to the broker-dealer no later than three (3) business days after proper exercise notification.
According to a further embodiment, if and when exercise of the vested employee stock options is required, the customer does not have to render the funds to pay the exercise price, rather the broker-dealer offers a traditional “cashless exercise” of the employee stock options and advances the exercise price of the options to the issuer/employer, thus ensuring prompt delivery of the underlying stock by the issuer/employer. Because the broker-dealer has the necessary control to exercise the employee stock options and is assured that the security will be promptly delivered by the issuer/employer, this transaction carries no more risk than if the customer actually held the stock in an account.
Described below is one example of how listed options to hedge vested employee stock options can work when following the illustrative hedging method of the invention.
For example, in September 2000, Employee holds 10,000 fully vested employee stock options with an exercise price of $50 per share and the Issuer/Employer's stock is currently trading at $100 per share.
For example, in September, Employee, utilizing only 1000 of his or her fully vested employee stock options, sells (writes) 10 November calls with a strike price of $120 for $5 each, thereby allowing Employee to collect $5000 in premium from the sale of the 10 listed call options. Unlike the prior example, Employee is not required to deposit margin into his or her brokerage account. Specifically, Employee does not have to deposit $25,000 of margin into the account. Instead, prior to entering into this transaction, Employee delivers the above mentioned documents to the broker-dealer carrying the Employee's account.
If the stock is trading above $120 on the listed option expiration on the third Friday in November, the 10 listed call options are assigned and 1000 of Employee's employee stock options are exercised at a price of $120 on a “cashless exercise” basis pursuant to the documents. Similar to a traditional “cashless exercise,” the broker-dealer delivers to the Issuer/Employer the amount of money necessary to fund the employee stock option exercise. Once the broker-dealer has received the proceeds of the sale on settlement date, a portion of the proceeds from the sale of the stock is used to pay back both the monies advanced by the broker-dealer to the Employee to effect the exercise of the employee stock options as well as the brokerage commission due. The remainder of the proceeds will be paid to the Employee.
Alternatively, if at the listed option expiration on the third Friday in November, the stock is trading below $120, the listed call options expire worthless, the Employee retains his or her employee stock options, keeps the $5000 collected in premium and the transaction closes.
The illustrative embodiment of the hedging technique of the invention enables holders of vested employee stock options to realize multiple benefits. One benefit is that those individuals typically deemed “paper rich, cash poor” are now able to generate liquidity and protect their vested employee stock options without being required to meet substantial margin requirements. Specifically, in accordance with the above example, Employee is not required to deposit $25,000 in cash to engage in this transaction. Another benefit is that, in contrast to conventional approaches, individuals who enter into the transactions of the above example, using the methodology of the invention, are not required to meet calls for substantial additional margin in the event of adverse market movements. Without the methodology of the invention, these transactions are viewed as uncovered or “naked” options positions. Under such a paradigm, a customer is required to deposit and maintain sufficient margin with his or her broker to assure that the stock can be purchased for delivery if and when the listed call option is assigned. Thus, individuals who enter into these transactions are deemed uncovered or “naked” option writers and may have to meet calls for substantial additional margin in the event of adverse market movements. The illustrative hedging technique of the invention eliminates these types of margin calls.
Tax Disclosure—Character Mismatch.
The tax considerations that arise from hedging vested or unvested employee stock options are complex. One primary difficulty encountered in hedging employee stock options from a tax perspective is that all gains from the underlying employee stock option are typically taxed as ordinary income. By contrast, gains or losses from any non-employee (exchange-traded or OTC) stock option hedges are treated as capital gains or losses.
If the stock underlying the employee stock option appreciates after the individual hedges, employee stock option gains are ordinary and corresponding hedging losses generally are capital. Because capital losses cannot offset more than $3000 of ordinary income, the bulk of the capital losses will be deferred until the individual has capital gains from other investments.
For example, assume an individual has employee stock options to buy 10,000 shares of company stock at $10, and the stock is currently trading at $100. The individual enters into a “collar” that leaves him or her exposed to price fluctuations between $90 and $110. The collar is formed when the individual buys a listed or OTC put option at $90 and sells a listed or OTC call option at $110 ($100,000 to exercise ($10 *10,000). As a result of the put option, the, individual may sell the stock at $90 (regardless of how far stock price falls). Therefore, the individual is assured pre-tax profits of $800,000 (900,000−100,000=800,000)). The collar both protects the individual from his or her risk of loss by allowing him or her to sell the underlying stock for $90, and limits his or her opportunity for gain by obligating him or her to sell for $110. Thus, the individual's pre-tax profit is guaranteed to be at least $800,000 and could be as much as $1 million. Yet, as the table below shows, individuals who cannot use their capital losses find this pretax gain eroded—indeed, it can turn into a loss—as the underlying stock appreciates.
For example, if the stock price rises to $200, the individual nets a $1 million pre-tax profit. In addition, the option has an extra $900,000 of ordinary income on the employee stock option and a corresponding $900,000 capital loss on the hedge. However, the individual cannot use this loss to avoid tax on the ordinary income. Assuming the individual does not have capital gains from another investment, his or her tax bill rises by $356,400 (i. e., 39.6 * 900,000), making his or her total current tax bill ($752,400) more than 75% of his or her economic profit. Moreover, the table shows that if the price increases to $300, the individual's $1.14 million current tax bill exceeds his or her $1 million economic profit.
Tax Environment Without the Illustrative Methodology of the Invention—90-110 Collar on Employee Stock Option with $10 Grant (Exercise) Price.
Because capital loss on the hedge is potentially unlimited, since it grows with the company's stock price, not all individuals will be sure, ex ante, of having enough capital gains to use all their capital losses. The individual thus bears a risk without any offsetting reward, because having capital gains allows him or her, at most to break even. Moreover, even individuals who expect to have capital gains, could be forced to recognize it prematurely.
Tax Disclosure—Elimination of Character Mismatch when Utilizing Options to Hedge Employee Stock Options.
According to a further embodiment, the methodology of the invention makes it possible to treat the return on the hedge as ordinary instead of capital, thus avoiding the mismatch with the employee stock options' ordinary return and the potential capital loss on the hedge. The illustrative methodology of the invention treats any losses arising on a closing transaction with respect to the short call as ordinary losses. In one embodiment, the individual achieves ordinary loss treatment by making a hedging election pursuant to Internal Revenue Code Section 1221 (a)(7), which is normally used only for “non-employee” stock options. The unique application of the hedging election to employee stock options enables the individual to character match the gains/losses encountered when hedging employee stock options and thereby potentially provides the individual with a reduced tax burden.
In the absence of the illustrative methodology of the invention, losses with respect to written calls are generally treated as short-term capital losses in the case of a non-dealer employee. The illustrative methodology of the invention recognizes that when an individual hedges an employee stock option by selling a short call, the hedge can be characterized as a hedging transaction as defined in Section 1221(a)(7) of the Internal Revenue Code and Treasury Regulation Section 1.1234-4, which thereby entitles the employee stock option hedge to treatment as an exception to capital loss treatment in the case of written call options that are part of a hedging transaction. One advantage of using the methodology of the invention is that any losses arising on a closing transaction with respect to the short call is treated as ordinary losses for tax purposes, provided the individual makes the hedging election discussed above.
Tax Environment Using the Illustrative Methodology of the Invention:—90-110 Collar on Employee Stock Option with $10 Grant (Exercise) Price.
In one illustrative embodiment, the employee stock option hedging methodology of the invention is performed by a computer program in support of trading transactions requested by brokers who are authorized to operate in an exchange that allows trading in such employee stock options. The computer program can, for example, be hosted on a computer system that is accessible by the broker and which is coupled to a market maker via a communications network (e. g., LAN, MAN, WAN). The computer program receives trading request inputs from a broker or investor, processes the inputs, provides a transaction request to the market maker, and receives confirmation from the market maker that the employee stock option hedge has been implemented according to a particular bid-ask spread. The program can also display details of the transaction and transaction request to the broker or investor, send an electronic confirmation of the transaction to the broker, investor, or other predetermined party (e. g., the other party to the hedging transaction and/or to representatives of the exchange, SEC, or tax authority), and cause a transaction report to be prepared. The program can also be configured to terminate the employee stock option hedge by sending instructions to the market maker to exercise the employee stock option. In an alternative embodiment, the illustrative employee stock option hedging methodology is performed by a computer program that also performs the market making activities of the exchange.
In another illustrative embodiment, the employee stock option hedging methodology is incorporated within a computer program that provides an investment advisor or investor with the expected financial outcomes (including tax consequences) of the employee stock option hedge. In this illustrative embodiment, the computer program can receive a proposed transaction request, process the proposed transaction using real or simulated information (i. e., parameters specified by the investment advisor or investor), determine the financial and tax outcome of the transaction given current market conditions or in view of simulated market conditions, and display the financial results to the investment advisor or investor.
In one embodiment, the computer program can be a standalone program that is not coupled to external data feeds (e. g., financial information service providers) or communication networks. In another embodiment, the computer program is coupled to external data feeds and or local data sources (e. g., financial data on a CD-ROM), but not to brokers or other entities capable of executing the proposed hedging transaction. In yet another embodiment, the computer program is coupled to external data feeds and/or local data sources as well as to brokers and/or market makers so that if the investor agrees to the proposed transaction, a corresponding transaction request can be generated to establish the employee stock option hedge as described above. In one particularly advantageous embodiment, the employee stock option hedging transaction is performed by a computer program operating on a web server that is accessible via the Internet.
The computer program can also be adapted to allow multi-user access at the same time so that an investment advisor and investor can “share” the program and thereby view and interact with the same output data during the employee stock option hedge decision/evaluation process. The computer program can also be adapted to aggregate employee stock option hedge transaction requests from a plurality of users and to present a corresponding single transaction request to a broker or market maker. In this manner, the program can leverage the smaller individual transaction requests into a larger single transaction that may result in reduced brokerage fees or in a narrower bid-ask spread.
Described herein is a method for hedging a particular asset by which certain persons may hedge the risk associated with said asset. The method further includes hedging an employee stock option by selling listed equity options, using said employee stock options as collateral. The method further includes hedging employee stock options by selling listed equity options without the requirement of margin. The employee stock options can be immediately exercised without restriction (not including the payment of money) to purchase an equal or greater quantity of the security underlying the listed equity option provided that the employee stock option does not expire before the listed call option, and provided that the amount (if any) by which the exercise price of the employee stock option exceeds the exercise price of the listed call option is held in or deposited into an account. The method further includes the tax treatment of the return on a listed equity option or over-the-counter option hedge of a particular asset or employee stock option as ordinary instead of capital. The method further includes the tax treatment of any losses on the call option sold as ordinary losses, provided certain persons make a valid hedging election pursuant to certain sections of the Internal Revenue Code.