Hurdle rate : executive stock options

Executive stock options with a rising strike price are a recent innovation in executive compensation in Australia and New Zealand. These options combine a dividend protection feature and a strike price that increases at a hurdle rate set with reference to a cost of capital estimate. With a constant dividend yield, the strike price becomes a path-dependent function of the stock price and exact analytic valuation becomes intractable. However, path-dependent American options can be valued using a Monte Carlo approach proposed in Longstaff and Schwartz (2001). We examine procedures for valuing these options and compare them with Black and Scholes (1973) and Merton (1973) formula valuations. <br />