Financial Options and Equity-Based Compensation

Flashcards covering key vocabulary and concepts from the lecture notes.

Equity-Based Compensation

Securities linked to the value of the employer’s common stock incorporated into employee compensation.

ESOs

Employee stock options.

RSUs

Restricted stock units.

Option

A security that gives the owner the right to buy (or sell) an asset at some predetermined price within a set time-period.

Exchange-Traded Options

Options to buy and/or options to sell the common share of a company, traded on a derivatives exchange.

Montreal Exchange (MX)

Canada’s derivatives exchange.

Call Option

Gives the buyer of the option the right, but not the obligation, to buy the stock; the seller has the obligation to sell if the option is exercised.

Put Option

Gives the buyer of the option the right, but not the obligation, to sell the stock; the seller has the obligation to buy if the option is exercised.

Intrinsic Value

The value of an option if it was exercised immediately.

Time Value

The difference between the option’s market value and its intrinsic value.

Option Writer

The seller of an option.

Zero Sum Game

The gains/losses by one party are exactly offset by the gains/losses of the other.

Black-Scholes Option Pricing Model (OPM)

Formalizes option-valuation concepts into a mathematical model to estimate the value of an option prior to expiry.

Employee Stock Options (ESOs)

Provide the owner with the right, but not the obligation, to purchase a fixed number of common shares at a fixed price for a certain period of time; cannot be sold, only exercised.

Vesting

Delays the actual receipt of the options and allocates them over time.

Restricted Stock Units (RSUs)

Actual common shares that are subject to a vesting schedule.