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When there are restrictions placed on the options, how should it be taken into consideration during a share option valuation?

When there are restrictions placed on the options, how should it be taken into consideration during a share option valuation?

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Joanne
 

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There are different kinds of restrictions when dealing with share options. And it should be considered in a case-by-case fashion. For example, when the vesting date is different from the grant date, we take cares of this difference by setting the vesting date as our exercisable date. Another example is that often, company limits the option holder to transfer his shares, which is just converted from his options, to others in a given period of time. Effectively, the shares converted from the exercise of options are restricted shares. Since the shares converted are restricted from sales within year(s), a liquidity discount is applied to the value of the Options to reflect the illiquidity and lack of control of the underlying securities during the given restriction period. This liquidity discount is calculated, for example, using a Black-Scholes Option Pricing Model for European put option.

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BMI
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