In the 1990s,a number of companies which had experienced sharp stock price declines,"repriced" previously-awarded employee stock options.Repricing consisted of resetting the options' strike prices to the current stock price (so as to bring them closer to the money).Suppose a company awards at-the-money stock options to its employees and decides it will reprice them if the stock price falls 50% from the initial award date.Then,the employee stock option is equivalent to a portfolio of
A)A vanilla call and a forward-starting call.
B)A knock-out and a knock-in barrier call option.
C)A knock-out call and a forward-strarting call.
D)A cliquet.

Question

Quizplus · Accepted Answer

A knock-out and a knock-in barrier call option combination effectively describes the scenario. If the stock price falls 50%, the original options are "knocked out" (become worthless) and new options are "knocked in" (become active) at the new lower price, similar to the repricing strategy described.

In the 1990s,a Number of Companies Which Had Experienced Sharp