Corporations often sell, or exchange for goods and services, various call options on their shares. Describe the process of issuing call options

Answer 1

ISSUE UNDER OPTION ARRANGEMENTS

Corporations often sell, or exchange for goods and services, various call options on their shares.

A call option gives the holder the right to acquire shares of common stock at a fixed or determinable price, called the strike price or exercise price. If the market price of the shares increases above the exercise price, the holder of the option can benefit by exercising the option to purchase shares. The excess of the market price over the exercise price is the option's intrinsic value.

Stock Options and Stock Purchase Rights

Many firms pay part of the compensation of some employees by issuing call options on their own shares. Common terminology refers to these arrangements as employee stock options (ESOs). These stock options typically permit the employees to purchase shares of the employer's common stock at a fixed exercise price that the employer often sets equal to the market price of the stock at the time it grants the stock option. Firms adopt stock option plans to motivate employees to take actions that will increase the market value of the firm's common shares, to conserve cash and, in the United States, to take advantage of the favorable tax treatment that income tax laws accord this form of compensation. Firms may also grant or sell stock purchase rights to current shareholders, which give the shareholders the right to purchase shares of common or preferred stock at a specified price. Firms may also sell or exchange call options for goods and services with counterparties other than employees.