Customer Reviews

Valuing Employee Stock Options (Wiley Finance)

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Jonathan Mun is one of those authors with lean credentials who write a book to establish themselves as experts in a field, rather than seeking to clarify an admittedly complex suject for the reader. In so doing, he manages to cram a 15-page paper into a 300-page book, primarily by being repetitive and secondly by including lots of obscrure tables.

Aha!, one says, I'll load the accompanying C.D. and work my way through the spreadsheet examples. Well, unfortunately the speadsheets are not operational. In order to use them, you have to buy the author's working version for a mere $1,000. For even more, you can buy Mun's corporate solutions for HR departments. In other words, the book is simply one long advertisement for Mun's software company, and is of limited usefulness to readers seeking to understand the complexities of ESOs.

This is not Wiley's standard practice. For instance, another of their books ["Financial Modeling" by Chandan Sengupta], which discusses option pricing using lattice models, contains a cd with working Excel spreadsheets that are fully operational. Unfortunately, it does not discuss ESOs, which differ somewhat from regular stock options.

So what are the alternatives?

1. The casual user (e.g., an employee who wants to get an idea of what his stock options are worth) can use one of the many calculators for general options available for free on the internet. A good one is the Option Pricing Calculator by OTrader Software.

2. Three useful articles for understanding the basics of lattice models are "Valuing employee Stock Options Using a Lattice Model" from the December 2004 issue of the CPA Journal, "Valuing Employee Stock Options: A Binomial Approach Using Microsoft Excel" from the July 2005 issue of the CPA Journal , and "How to 'Excel" at Options Valuation' from the December 2005 issue of the Journal of Accountancy. All three articles contain Excel spreadsheets as examples.

3. Readers wishing Excel spreadsheets that incorporate all of the features unique to EOSs (vesting periods, termination, illogical behavior, etc.) may wish to consider purchasing (@ 1/15 of Mun's price) Peter Hoadley's ESO package over the Internet. He also provides (for free) links to academic papers on the subject.

NOTE: The book describes Mun's credentials as follows:

"JOHNATHAN MUN is Vice President of Analytical Services at Decisioneering, Inc., the makers of Crystal Ball° analytical software. His duties focus primarily on heading up the development of real options and financial analytics software powered by Crystal Ball. Prior to joining Decisioneering, he was a consulting manager and financial economist in the Valuation Services and Global Financial Services practice of KPMG Consulting, and a manager with the Economic Consulting Services practice at KPMG LLP. He holds a PhD in finance and economics, and an MBA and MS in management. Mun is also certified in financial risk management and in financial consulting. He is currently a visiting professor in finance, economics, and statistics at various universities, including the University of Applied Sciences (Germany), the Swiss School of Management (Switzerland), and Golden Gate University (California). Mun is the author of Applied Risk Analysis, Real Options Analysis, and Real Options Analysis Course, all published by Wiley. He continues to offer worldwide seminars and lectures on the topics of real options, simulation and risk analysis, and corporate finance."

The book does a decent job of providing intuition on why traditional Black-Scholes framework will not work for Employee Stock Options. But then again, if directional intuition is what you are seeking, why spend the money on this book when you can get the same information by reading articles published in the Financial Analysts Journal (FAJ)? The book and the accompanying CD seem to be very cryptic when it comes to understanding the effects of early exercise. The CD is pretty much a black-box. If you think you can buy this book and explain the results of the analysis, then you are mistaken. Unless you have a PhD in Finance or a Masters in Financial Engineering, you may not understand what the algorithms do. Then again, if you had these degrees, you wouldn't need the book!