How does volatility affect stock compensation expense?

CFA Level II
#1

How does volatility affect stock compensation expense in years after stock option granted? Do you also adjust fixed cost and depreciate for inflation if all other variables are adjusted for inflation or do you leave them as is? Thanks

#2

Is that from mock question 2 afternoon? I’m stuck on that too…I’m wondering how dividend yield afftects option prices

#3

volatility rising means option costs go up. Employees are given call options at the expense of the company (ie stock options). If those options become more valuable, that is a cost to the company, and the pension expense for the year goes up (likewise the DBO).

#4

Dividend yield has the opposite effect. When dividends are paid, the stock goes down by the amount of the dividend. A call option’s minimum value is the maximum of [0, or S - X] X is the strike price S is the stock price Assume a stock is valued at $50. Assume also that the company issues call options to its employees with a Strike price of $55. it’s out of the money, but as that stock price gets closer (or surpasses) 55, that call option will be worth money, money at the expense of the company. If they pay more dividends, that will make the stock value go down, and keep it further away from that $55 mark, thus keeping its value nice and low (likewise with the related pension expense)

#5

canadiananalyst Wrote: ------------------------------------------------------- > Is that from mock question 2 afternoon? I’m stuck > on that too…I’m wondering how dividend yield > afftects option prices I believe he is talking about another question but to answer yours… call options decrease in value as dividends increase since in this case dividends are decreasing (yield decrease), the call option goes up in value

#6

Damil4real Wrote: ------------------------------------------------------- > How does volatility affect stock compensation > expense in years after stock option granted? > > Do you also adjust fixed cost and depreciate for > inflation if all other variables are adjusted for > inflation or do you leave them as is? > > Thanks Is not stock option expensed at the fair value on the issuing date over the vested period? I am confused …

#7

i understand the increase in option value due to increased volatility but does the stock compensation expense also increase even if volatility (and option value) increases AFTER the grant date (and i was assuming compensation expense is value of options at grant date amortized over vesting period)

#8

madamesoleil Wrote: ------------------------------------------------------- > Damil4real Wrote: > -------------------------------------------------- > ----- > > How does volatility affect stock compensation > > expense in years after stock option granted? > > > > Do you also adjust fixed cost and depreciate > for > > inflation if all other variables are adjusted > for > > inflation or do you leave them as is? > > > > Thanks > > > Is not stock option expensed at the fair value on > the issuing date over the vested period? I am > confused … That’s what I thought too. I thought the stock option compensation expense pretty much stays the same regardless of change in volatility.

#9

you dont depreciate anything for inflation. get the FV of the options grant and expense it as the employee vests into the options. higher volatility makes options more expensive to issue compared to the same number of options with lower volatility.

#10

you dont retroactively go back and reprice the options, you take the cost of the options at the time of issue. the higher volatility is for new options being granted.

#11

starbuk Wrote: ------------------------------------------------------- > you dont depreciate anything for inflation. get > the FV of the options grant and expense it as the > employee vests into the options. higher > volatility makes options more expensive to issue > compared to the same number of options with lower > volatility. you actually do adjust sales, cogs…etc for inflation, but do u also adjust depreciation, taxes, fixed cost?

#12

Thanks

#13

starbuk Wrote: ------------------------------------------------------- > you dont retroactively go back and reprice the > options, you take the cost of the options at the > time of issue. the higher volatility is for new > options being granted. agreed!

#14

Dividend yield increases, compensation expense decreases. Volatility increases, compensation expense increases. FC and Depreciation need to be adjusted for inflation.

#15

Damil4real Wrote: > > Is not stock option expensed at the fair value > on > > the issuing date over the vested period? I am > > confused … > > > That’s what I thought too. I thought the stock > option compensation expense pretty much stays the > same regardless of change in volatility. No they are not always fixed…I think the requirement now is that they are not fixed. The idea here is that the option has a value that changes with the underlying movement, so the option expensew for the year depends on the likelihood of the employees getting their shares…the higher the volatility, the higher it is that the stock option will be in teh money and the company will pay.