This book was written after FASB released its proposed FAS 123 revision
Tin March 2004. As one of the valuation consultants and FASB advisors
on the FAS 123 initiative in 2003 and 2004, I would like to illustrate to
the ﬁnance and accounting world that what FASB has proposed is actually
pragmatic and applicable. I am neither for nor against the expensing of
employee stock options and would recuse myself from the philosophical
and sometimes emotional debate on whether employee ...
Chapter 1: Implications of the New FAS 123 Requirements. The revised 2004 statement retains the principle established in FAS 123 (1995) that a public entity should measure the cost of employee services received in exchange for awards of equity instruments based on the fair value
of the instruments at the grant date.
Chapter 6: Expense Attribution Schedule. The ESOs valued will have to be attributed over the life of the option. This expense attribution can employ a straight-line method that is simple and takes the value of the ESO and evenly allocates its value starting from the vested period and extending to the option’s maturity.
Despite the importance of the topic, however, there appears to be essentially no evidence on
the link between option grants and firm riskiness. Guay (1997) finds, in 1988 data (which largely
predates the option explosion) that firms appear to grant options more frequently in companies with
growth opportunities, which is consistent with the explanation that firms may attempt to use options
to increase risk-taking. Likewise, Tufano (1998) finds evidence in gold mines that managers with
more options hedge gold price risk less. Using data from 1978 through 1982, DeFusco et al.
Automated stock trading is a burgeoning research area with important practical applica-
tions. The advent of the Internet has radically transformed the nature of stock trading in
most stock exchanges. Traders can now readily purchase and sell stock from a remote
site using Internet-based order submission protocols. Additionally, traders can moni-
tor the contents of buy and sell order books in real time using a Web-based interface.
Chapter 2: The 2004 Proposed FAS 123 Requirements. The FASB concluded that the 2004 proposed FAS 123 would require a single method of accruing compensation cost for awards with a graded vesting schedule.
You cannot predict the future or control the present—these are prime directives
governing the creation and use of options.
This text takes the mystery out of predicting and profiting from the future price
trends of stocks and futures contracts using fundamental and/or technical analysis
along with option strategies that manage the associated risk. Savvy market operators
have devised methods of attacking the markets aggressively, while protecting
themselves from the daily risk of loss.
Congress likely would find itself embroiled in any such financial crisis through its direct role in
conducting fiscal policy and in its indirect role in the conduct of monetary policy through its
supervisory responsibility over the Federal Reserve. Such a coordinated withdrawal seems highly
unlikely, particularly since the vast majority of the investors are private entities that presumably
would find it difficult to coordinate a withdrawal.
The listing of stock exchanges, perhaps even more than their
demutualisation, has transformed their business model. Although
demutualisation is claimed to have changed the ownership of stock exchanges,
significant ownership stakes were often retained by previous member firms
(Steil, 2002). Therefore, the fundamental governance structure of exchanges was
not significantly impacted. Self-listing and the subsequent dispersion of
ownership of exchanges have finally divorced their interests from those of
The investment portfolio typically has a significant impact on an FHLBank’s total interest rate
risk profile. While FHLBanks may manage the interest rate risk of its mortgage assets by
combining AMA and MBS, and manage the economic value risk of the entire FHLBank through
VaR metrics, it is nonetheless a sound practice to separately measure and control price sensitivity
in the investment portfolio with limits for price changes given rate changes.
For example, the FHLBank may limit the portfolio’s sensitivity to 10 percent when interest rates
change 300 basis points.
In this chapter we look at some common forms of compensation in which the amount of the compensation employees receive is tied to the market price of company stock. We will see that these share-based compensation plans-stock awards, stock options, and stock appreciation rights-create shareholders’ equity. The nature of this compensation will impact the way we calculate earnings per share, the topic of the second part of this chapter.