The company's board believes that the trading price of its stock on the OTC market is not indicative of the fair value of the stock. It, therefore, set the fair value of its stock at $x and is granting options at that exercise price (which is above the OTC trading price). How would we incorporate that number into the Black-Scholes option pricing model?
How do we determine the fair value of stock options when the company's board has determined the fair value of the stock to be something other than market sale price?
Answers
The input to the Black-Scholes model for the fair value of the underlying stock is quoted market price for publicly traded securities on the measurement date. Regardless if the Board believes the fair value is actual higher, therefore the expense would be based on the quoted price not the Board's price.
Refer to PwC's Guide to
I agree that the market price, or current price of the stock would be its market price, not what the board believes. The exercise (strike) price, however, would be the amount set by the board, which appears it would be above the market price. This would make the option out of the money (or underwater) at the award/grant date, and result in a lower value for the option (and resulting expense) than if the exercise price and market price were the same at grant.
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