A Critical Review of the Fair Value Settlement Procedure for Stock Options

Abstract

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