A Critical Review of the Fair Value Settlement Procedure for Stock Options
Applied Finance Letters, Vol. 4, No. 1&2, pp. 20-25, 2015
15 Pages Posted: 5 Jul 2013 Last revised: 20 Jan 2016
Date Written: December 1, 2014
We review the European practice of fair value settlement of stock options after a successful takeover bid. We argue on both fundamental and practical grounds that the inherent complexity, arbitrariness and inaccuracy of fair value calculations call for replacement by intrinsic value settlement. This alternative is simple, transparent, well-defined, and common practice at other exchanges.
Keywords: fair value, intrinsic value, stock option, implied volatility, option pricing, takeover
JEL Classification: G28, G23
Suggested Citation: Suggested Citation