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 observations.
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.
Underwater options do not contain any type of natural correction mechanism to preserve their retentive value.
A number of functions convenient for underwater photography have also been added, including
Underwater options for white balance and auto distortion control.
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.
