Such exchanges can take on one of two key forms: a one-for-one exchange, similar to that recently completed by Google Inc., in which each underwater option
traded in is replaced with a new option with a lower exercise price; and a value-for-value trade similar to the recent Starbucks Corp.
Panel B of Table IV shows the values of vega-to-delta and vega as a percentage of salary plus bonus for all executive-year observations, and also the underwater option
And in practice, the underwater option
problem causes significant problems for companies that rely heavily on options.
Risk factors, such as stock price volatility help reduce the option value, but an underwater option
may have current value.
'This generated a great deal of interest from all over the world and inspired us to look at the underwater option
as we are aware that Nessie does not often make it to the surface.'
One-for-one exchanges, where the optionholder receives a new, market-priced option for each underwater option
, are the most controversial, as the executive recovers the entire value lost in the stock market decline, and so is relieved of the pain felt by the shareholders.
do not contain any type of natural correction mechanism to preserve their retentive value.
In November 2009, 99% of Fortune 500 CEOs held underwater options
(Tammy Whitehouse, "Companies Awash in Underwater Stock Options," Compliance Week, April 2008).
In other words, the poor performance of firms with underwater options
was mainly due to industry-related factors.
Thus, it could receive a deduction for underwater options
that are sold.
. When an option is underwater, Statement no.