Journal of Derivatives AccountingVol. 02, No. 02, pp. 189-201 (2005) ARTICLESNo AccessEXECUTIVE STOCK OPTIONS: A FIRM VALUE APPROACHPHELIM BOYLE and WEIDONG TIANPHELIM BOYLECenter for Advanced Studies in Finance, University of Waterloo, Waterloo, Ontario N2L 2Gl, Canada and WEIDONG TIANDeparment of Statistics and Actuarial Science, University of Waterloo, Waterloo, Ontario N2L 2Gl, Canadahttps://doi.org/10.1142/S0219868105000422Cited by:0 PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail AbstractExecutive stock options are an important component of executive compensation and the topic is of interest to both practitioners and academics. The vigorous debate on whether these options should be treated as an expense is subsiding but discussion continues on how these instruments should be valued in order to expense them. In this paper, executive stock options are viewed as contingent claims on a firm's assets and we formalize this through the concept of an augmented balance sheet. This means that the total market value of the firm's assets is equal to the market value of its traded securities plus the market value of its stock options. This approach leads to two valuation formulae for these options: one in terms of the firm's stock price and the other in terms of firm value. We explore the connections between these two approaches and derive explicit valuation formulae under certain assumptions.Keywords:Valuationexecutive stock optionsdilution References D. Aboody, Journal of Accounting and Economics 22, 357 (1996). Crossref, Google ScholarL. A. Bebchuk and J. M. Fried, Journal of Economic Perspectives 17(3), 71 (2003). Crossref, Google ScholarL. A. Bebchuk, J. M. Fried and D. I. Walker, University of Chicago Law Review 69(3), 751 (2002). Crossref, Google ScholarY. Bergman, B. Grundy and Z. 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Fitch Ratings has completed its first study of derivatives accounting and disclosure among corporate entities, excluding financial institutions. Derivatives have become an integral part of the risk management framework for major corporate issuers of debt, allowing active management of interest rate, foreign exchange, commodity price, and equity exposures. Moreover, the growing use of derivatives coincides with rapid developments in the derivatives market, including the availability of a broader range of derivative products. Fitch surveyed 57 global corporations to assess the types of derivatives used, accounting and financial reporting implications, and disclosure quality. This survey was intended to generate representative data only and is not necessarily reflective of the market as a whole. The paper presents the key findings and other important industry issues.
Journal of Derivatives AccountingVol. 02, No. 01, pp. 1-13 (2005) ARTICLESNo AccessDIVERGENT FAS-133 AND IAS-39 INTEREST RATE RISK HEDGE EFFECTIVENESS: PROBLEM AND REMEDIESJAMES N. BODURTHA, JR.JAMES N. BODURTHA, JR.The McDonough School of Business, Georgetown University, Old North 313, 37th & O Streets, NW, Washington, DC 20057, USA Search for more papers by this author https://doi.org/10.1142/S0219868105000276Cited by:3 PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail AbstractGenerally, it is presumed that an interest rate swap hedge of fixed income assets and liabilities will be 100% effective. Specifically, SFAS-133.68 actualizes this effectiveness through its short-cut method (SCM) interest rate risk hedge specification. We show that this presumption is false. This negative finding leads to a severe IAS-39 implementation problem because IAS-39 explicitly precludes the SCM. Furthermore, this problem has major implications for bank (and insurance) capital requirements. We specify a series of remedies for this problem. We believe that the best remedy falls in the fine print of IAS-39.F.5.5 guidance. In this guidance, a "theoretical swap" hedge effectiveness method, (B), effectively, provides FAS-133 SCM treatment for analogous IAS-39 interest rate risk hedges.This problem was posed by Pierre Schroeder. I thank him and his Société Générale (SG) DEFI team, as well as Gary Davis, Charles Lee, Patricia Fairfield, Eric Leininger, Rick Lynch, Prem Jain, Rob Royall, Dan Thornton, and Teri Yohn for helpful comments. During the Fall of 2003, a gift from SG provided release time for this work.Keywords:Interest rate risk hedgeSFAS-133IAS-39hedge effectiveness References M. E. Barth, W. H. Beaver and W. R. Landsman, Accounting Review 71(4), 513 (1996). Google Scholar Bodurtha Jr., (2000). Notes on Prospective Hedge Effectiveness Analysis. Georgetown University working paper . Google ScholarJ. Bodurtha Jr. and D. B. Thornton, Journal of Derivatives 10(1), 62 (2002). Crossref, Google ScholarM. J. Brennan and E. S. Schwarz, Journal of Financial and Quantitative Analysis 301 (1982). Google ScholarG. Coughlanet al., Journal of Derivatives Accounting 1(2), 221 (2004). Link, Google ScholarD. Duffie and R. Kan, Mathematical Finance 6(4), 379 (1996). Crossref, Google Scholar The Coming Storm (19 February 2004). The Economist . Google Scholar Ernst & Young (2001). Financial Derivative Developments, Accounting for Derivative Instruments and Hedging Activities, December . Google ScholarD. Heath, R. Jarrow and A. Morton, Econometrica 60, 77 (1992). Crossref, Google ScholarL. Hodder, M. Kohlbeck and M. L. McAnally, Contemporary Accounting Research 19(2), 225 (2002). Crossref, Google ScholarJ. Hull and A. White, Journal of Derivatives 37 (1994). Google Scholar OCC (2002). Minimum Capital Ratios; Issuance of Directives, 12 CFR Part 3, January 1 . Google ScholarM. S. Park, T. Park and B. T. Ro, Journal of Accounting, Auditing & Finance 14(3), 347 (1999). Crossref, Google Scholar PWC (2002). A Guide to Accounting for Derivative Instruments and Hedging Activities . Google Scholar FiguresReferencesRelatedDetailsCited By 3Aspectos a considerar en los cálculos de efectividad de una cobertura de valor razonable en donde el swap de tasa de interés intercambia una tasa flotante por otra tasa flotanteMiguel A. García, Heriberto G. Martínez and Jesús G. Cruz7 December 2017 | Revista Innovaciones de Negocios, Vol. 6, No. 12Investigating international accounting standard setting: The black box of IFRS 6Corinne Cortese and Helen Irvine1 Oct 2010 | Research in Accounting Regulation, Vol. 22, No. 2Issues on Hedge Effectiveness TestingCristina Aurora Bunea-Bontas, Mihaela Cosmina Petre and Gica Culiţă1 Jan 2009 | SSRN Electronic Journal, Vol. 16 Recommended Vol. 02, No. 01 Metrics History KeywordsInterest rate risk hedgeSFAS-133IAS-39hedge effectivenessPDF download
Journal of Derivatives AccountingVol. 02, No. 01, pp. 63-76 (2005) ARTICLESNo AccessSTRUCTURAL RELATIONSHIPS BETWEEN SEMIANNUAL AND ANNUAL SWAP RATESDAVINDER K. MALHOTRA, MUKESH CHAUDHRY, and VIVEK BHARGAVADAVINDER K. MALHOTRAPhiladelphia University, School House Lane and Henry Avenue, Philadelphia, PA 19144-5497, USACorresponding author. Search for more papers by this author , MUKESH CHAUDHRYIndiana University of Pennsylvania, 1011 South Drive, Indiana, PA 15705, USA Search for more papers by this author , and VIVEK BHARGAVAAlcorn State University, MBA Program, 15 Campus Drive, Natchez, MS 39120, USA Search for more papers by this author https://doi.org/10.1142/S0219868105000318Cited by:0 PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail AbstractThis study investigates the long-run stochastic properties of semiannual and annual swap rates in the framework of cointegration methodology. Initial exploratory tests show that both semiannual and annual swap rates exhibit nonstationarity, which makes it logical to use cointegration methodology. Short- and long-term relationships between semiannual and annual swaps' bid and offer rates are reported for all maturities. We investigate whether semiannual and annual interest rate swap markets are segmented or integrated. The information derived from the analysis sheds light on linkages and informational flows between semiannual and annual swap markets.Keywords:Interest rate swapscointegrationLIBOR References P. Abken, Advances in Futures and Options Research 6, 93 (1993). Google Scholar H. Akaike , Second International Symposium on Information Theory , eds. B. N. Petrov and F. Csaki ( Budapest , 1973 ) . Google ScholarJ. Bicksler and A. H. Chen, Journal of Finance 645 (1986). Google ScholarR. Brooks and D. K. Malhotra, Advances in Futures and Options Research 7, 237 (1994). Google ScholarK. Brown and D. J. Smith, Financial Management 22, 94 (1993). Crossref, Google ScholarK. Brown, W. Harlow and D. Smith, Journal of Fixed Income 3, 61 (1994). Crossref, Google ScholarR. Brown, F. In and V. Fang, The Journal of Fixed Income 12, 29 (2002). Crossref, Google ScholarC. Chuang-Chang and S. 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Google Scholar FiguresReferencesRelatedDetails Recommended Vol. 02, No. 01 Metrics History KeywordsInterest rate swapscointegrationLIBORPDF download
