ABC Corporation is planning to issue options to its key employees, and it is now

Question

ABC Corporation is planning to issue options to its key employees, and it is now discussing the terms to be set on those options. Which of the following actions would decrease the value of the options, other things held constant? ABC's stock price suddenly increases. The exercise price of the option is increased. The life of the option is increased, i.e., the time until it expires is lengthened. The Federal Reserve takes actions that increase the risk-free rate. ABCs stock price becomes more risky (higher variance).

Explanation / Answer

b. Exercise price of option is increased. This will increase the cost of exercising the option for theemployee thus reducing the value. This amount to reducing thedifference between Market price & exercise price thus makingthe options less attractive for the employees.

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