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Employee Stock Options Valuation

It allows decision makers valuing employee stock options (ESO) and their expenses associated using the same software the Financial Accounting Standards Board (FASB) uses to generate its FAS 123R examples and recommendations. ESO helps to combine thousands of assumptions and inputs to compute the fair value per option; for example: share options granted, employees granted options, expected forfeitures per year, share price at the grant date, exercise price, contractual terms (CT), interest rate, and expected volatility, and so forth.

Reduce Employee Stock Option (ESO) expenses by millions of dollars using the same software FASB uses to generate its FAS 123 examples

Learn how a FAS 123 preferred customized binomial lattice is calculated and how it compares to the naïve Black-Scholes. The software creator is an advisor to FASB and a professor and consultant in financial analytics, and the software was used by FASB to create the valuation examples in FAS 123. See how considering employee suboptimal exercise behavior, forfeiture rates, blackout periods, vesting, marketability discounts, and changing inputs over time (volatility, dividend yield, risk-free rate, forfeiture rate, and suboptimal behavior exercise multiple) can more accurately reflect reality, reduce expenses, conform to FAS 123 requirements, and pass an audit. See how ESO Valuations are done correctly!

Real Options Valuation, Inc. has created several proprietary software through its partners, including the following software:

  • Employee Stock Options Valuation Toolkit
  • Super Lattice Solver for Real Options Valuation
  • Multiple Super Lattice Solver for Multiple Assets

In most cases, our services include providing these software solutions to our clients at the end of the consulting project, as well as providing customized software, models, and analytical codes that are very specific to the client's situation. Click here for a sample case study on applying FAS 123 and click here to download the software data sheet. Please contact us directly to obtain a demo version of the software.


  • Our software products were developed by Dr. Johnathan Mun, advisor to FASB on FAS 123.
  • Use the same software FASB uses! Software was used by FASB to create the valuation example in the 2004 FAS 123 (Appendix A87).
  • Our software models both closed-form models (Black-Scholes) as well as different binomial and trinomial lattices.
  • Theories are all covered extensively in the author’s books and articles—use the published books/research to successfully defend an audit
  • All equations are visible within Excel when creating your own option valuation models.
  • Costs a lot less than expensive consultants… have the ability to check their work instead!
  • Have the ability to compare the naïve Black-Scholes versus more sophisticated binomial lattice results (FASB’s preferred method).
  • Consulting projects will be implemented by Dr. Johnathan Mun, finance professor, consultant, and author of many well-known books.



  • American Closed-Form Models
  • Binomial and Trinomial Lattices
  • European Black-Scholes



  • Blackout Periods
  • Changing Forfeiture Rates
  • Changing Risk-free Rates
  • Changing Volatilities
  • Forfeiture Rates (Pre- and Post-vesting)
  • Stock Price Barrier Requirements
  • Suboptimal Exercise Behavior Multiple
  • Vesting Periods


    FASB Uses This Software! The figure below shows the solution of the case example provided in Appendix A87 of the Final 2004 FAS 123.

  • Specifically, A87-A88 states:
  • "A87. The following table shows assumptions and information about the share options granted on Jan 1, 20X5:
  • Share options granted 900,000;
  • Employees granted options 3,000;
  • Expected forfeitures per year 3.0%;
  • Share price at the grant date $30;
  • Exercise price $30;
  • Contractual term (CT) of options 10 years;
  • Risk-free interest rate over CT 1.5 to 4.3%;
  • Expected volatility over CT 40 to 60%;
  • Expected dividend yield over CT 1.0%;
  • Suboptimal exercise factor 2;

    A88. This example assumes that each employee receives an equal grant of 300 options. Using as inputs the last 7 items from the table above, Entity T’s lattice-based valuation model produces a fair value of $14.69 per option. A lattice model uses a suboptimal exercise factor to calculate the expected term (that is, the expected term is an output) rather than the expected term being a separate input. If an entity uses a Black-Scholes-Merton option-pricing formula, the expected term would be used as an input instead of a suboptimal exercise factor."
How do I install the software?

Make sure that you have administrative rights to install the software, and that your system requirements match or exceed those required in Item 1 above. In addition, make sure you have .NET Framework 2.0, 3.0, 3.5 or later already installed on your computer. Then, simply download the trial or full version of the software, double click on the exe file, and follow the instructions. Make sure to first uninstall any older versions of Risk Simulator before attempting to install a new version.

Resolution Issues

In WIN7 and Vista, users have the option to change the screen resolutions by “zooming in/out” and not just using a regular resolution change. When changing resolutions the regular approach (e.g., changing from 1280 x 800 to 1080 x 680) will not affect ROV software look and feel. However, using the zoom function does mess up some visuals (this is true of all software out there, and Windows actually even provides a warning message explaining this). The first two figures illustrate some effects of this zoom view.
Solution: Click on Start > Control Panel > Appearance and Personalization > Display and you see the user interface (see the third figure below). Change the view back to “Smaller 100% (Default)” then log-off and log-on to take effect and the RS/SLS software will display normally and correctly.

What is your return policy on software?

We have a typical software return policy where once opened, it cannot be returned. For instance, if you purchase an off-the-shelf software at CompUSA, Fry's, Best Buy, and so forth, once you open the software box, it is not returnable. The reason is that there is no guarantee that you have not already installed the software or made illegal copies of the software prior to returning. So, to reduce such risks, we highly suggest that you download the TRIAL VERSIONS of our software, test to your heart's content, and then make the final decision to purchase. We are not responsible if you decide not to test the trial version first (for applicability, installation, compatibility, and other evaluation issues). Also, for Risk Simulator, you have to first install the software and have it functioning before you can install the license anyway (that is, you would first need to successfully install and run the software before you can send us your Hardware ID, and for us to send you a permanent license). So, there is no excuse that the software does not work as you have 30 days to test drive it. To reiterate, the short answer is that once you get the permanent license, the software is not returnable, similar to its being already opened and out of the box and all sales are final.


Real Options Valuations and his CEO/Chairman Dr. Johnathan Mun are the software’s creator. These products including consulting and training activities have delivered and implemented in many Fortune 500 firms (from 3M, Airbus, and Boeing to GE and Motorola) and the government (Department of Defense, State and Federal Agencies, Central Banks, Regulators) on risk analysis, valuation, and real options. Dr. Johnathan Mun and his worldwide collaborators (risk managers, specialists and researchers) have written many books and peer-reviewed papers on the risk management and decision making, including Real Options Analysis: Tools and Techniques, 1st and 2nd Edition (Wiley Finance, 2002, 2005); Real Options Analysis Course: Business Cases (Wiley Finance, 2003); Applied Risk Analysis: Moving Beyond Uncertainty in Business (Wiley, 2003); Valuing Employee Stock Options Under 2004 FAS 123 (Wiley Finance, 2004); Modeling Risk: Applying Monte Carlo Simulation, Real Options Analysis, Forecasting and Optimization (Wiley, 2006); Advanced Analytical Models: 800 Functions and 300 Models from Basel II to Wall Street and Beyond (Wiley 2008); The Banker’s Handbook on Credit Risk: Implementing Basel II (Elsevier Academic Press 2008); and others. Real Options Valuation, Inc. develops advanced analytical software products and IT solutions, consulting, and training services in a joint venture with OSL Risk Management, Ltd.