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Option Model Assumptions

Option Valuation

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Option Model Assumptions

The screenshot below illustrates the assumptions input on the 'Option Assumptions' sheet.

The Black-Scholes model takes the following data points as inputs:

  • Stock Price at Grant Date: the actual stock price on the effective date for the option grant.
  • Exercise/Strike Price: the contractual strike price for the options in the grant.
  • Estimated Volatility: the volatility input for the Black-Scholes model or the potential upside stock movement for the underlying security during the expected life. Please see our Volatility Tool. This powerful tool can compute the volatility number using historical stock data.
  • Expected Life: the number years the option is expected to remain unexercised (strongly linked with volatility). Please see our Forfeiture & Expected Life Tool. This tool can help you define the expected life input using historical stock data.
  • Expected Dividend Yield: the potential dividend that may be paid by the company on an annual basis.
  • Risk-Free Rate of Return: the return/yield of a theoretical risk-free investment.

This sheet also includes bookkeeping entries to organize and manage multiple grants. The following information is tracked for each grant:

  • Grant Name: a short descriptive name for the grant.
  • Grant Creation Date: the effective date of the grant.
  • Total Options Granted: the size of the grant option pool.
  • Contractual Term: the length the option grant remains in effect.
  • Grant Status: a list of possible states for the grant (Active, Cancelled, etc.)

Help text is available for the inputs with the buttons marked with . The volatility help window is shown in the below screenshot.

The 'Calculate' button takes the assumptions and uses the defined Black-Scholes formulas to create a valuation. The first step in the calculation is to test the inputs for invalid data. If any inputs are out of range, an error message indicates what input is incorrect and the accepted range for that assumption. If all of the inputs are within the correct range, the model is computed and the 'Model Results' sheet becomes active. The 'Model Result' sheet shows the results of the calculation.

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