Accounting for Employee Stock Options: accelerating convergence

Hull and White (2004) have developed a lattice pricing model that makes explicit reference to parameters that are not available in Black Scholes (1973) yet are important for the valuation of Employee Stock Options (ESOs).... [ view full abstract ]

Hull and White (2004) have developed a lattice pricing model that makes explicit reference to parameters that are not available in Black Scholes (1973) yet are important for the valuation of Employee Stock Options (ESOs). Cvitanic, Wiener and Zapatero (2008) point out that a key weakness of the lattice approach, when applied to valuing ESOs, is the sluggish convergence not generally experienced in trees configured to estimate plain vanilla options. We propose a small refinement to Hull and White (2004), based on insights developed by Boyle and Lau (1994) which ensures faster convergence in lattice estimation when barriers occur.