Evaluating Incentive Options

We provide an analytical and flexible framework to evaluate incentive options. Our model not only considers vesting periods and trading and hedging restrictions on the holders, but also specifically includes provisions of reloading and resetting to capture the fact that firms tend to grant more options after existing options are either exercised or become deep out of the money. By treating the incentive option as a flow of barrier options, we are able to obtain a near-explicit formula for the option value. Our model allows us to discuss many issues related to incentive options such as their issuing cost, exercising strategies, and induced incentives. Especially, we highlight some significant interactions among different features of incentive options