Systems and methods for safeguarding employee stock options from stock price fluctuations

• US 20040172349A1
• Filed: 04/18/2002
• Published: 09/02/2004
• Est. Priority Date: 04/18/2002
• Status: Active Grant

• Current Assignee: Credit Suisse Incorporated (Credit Suisse)
• Original Assignee: Credit Suisse Incorporated (Credit Suisse)
• Inventors: Emerson, Michael W., Fields, James E., Quinn, Jeffrey, Turbin, Philip J., Vencil, Joseph, Crooks, Michael V., Pomeroy, James B.
• Granted Patent: US 7,917,416 B2
• Time in Patent Office: Days
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis
• CPC Class Codes: G06Q 40/10 Tax strategies

Abstract

Systems and methods for hedging against stock price fluctuations are provided. These systems and methods are preferably directed towards providing executives holding company stock options with opportunities to limit their exposure to fluctuations in the price of stock issued by such companies. This is established through entering into transactions involving stock options with a counterparty.

Claims

1. A method for protecting the value of compensatory employee options issued to an executive of a company, the employee options being stock options on company stock and having an employee option strike price E, the method comprising:

hedging the employee options, the hedging comprising;

buying a call option on company stock from the executive on a reference date; and

selling a put option on company stock to the executive on the reference date, the put option having a put strike price P, the call option having a call strike price C, wherein E≦

P≦

C, the call option expiring on a settlement date, the put option expiring on a date no later than the settlement date.

2. The method of claim 1 further comprising buying a second put option on company stock from the executive on the reference date, the second put option having a second put strike price substantially equal to or greater than E.

3. The method of claim 1 further comprising receiving a pledge of the employee options from the executive on the reference date.

4. The method of claim 1 further comprising receiving a deposit from the executive on the reference date, the deposit being substantially equal to the employee option strike price E.

5. The method of claim 1 further comprising loaning the executive an amount substantially equal to P no later than the settlement date.

6. The method of claim 1 further comprising receiving a power-of-attorney from the executive to exercise the employee options.

7. The method of claim 1 further comprising receiving approval from the company to allow the employee options to be non-forfeitable.

8. The method of claim 1 further comprising receiving approval from the company to allow the employee options to be assignable.

9. The method of claim 1 further comprising agreeing to buy shares of company stock underlying the employee options from the executive at an amount no less than P−

E.

10. The method of claim 1 further comprising identifying employee options that are in the money no later than the reference date.

11. The method of claim 1 further comprising guaranteeing the executive a net asset value NAV, on the settlement date, wherein (P−

E)≦

NAV≦

(C−

E).

12. The method of claim 1 further comprising settling at least one option from the group consisting of the employee options, the call option, and the put option on the settlement date.

13. The method of claim 1 wherein the buying the call option comprises buying a call option on a number X of shares of company stock, and wherein the selling the put option comprises selling a put option on the number X of shares of company stock, the number X of shares of company stock being no greater than a number of shares of company stock corresponding to the employee options.

14. The method of claim 13 further comprising receiving a deposit from the executive on the reference date, the deposit being substantially equal to X*E.

15. The method of claim 13 further comprising loaning the executive an amount substantially equal to X*P no later than the settlement date.

16. The method of claim 13 further comprising guaranteeing the executive a net asset value NAV, on the settlement date, wherein X*(P−

E)≦

NAV≦

X*(C−

E).

17. The method of claim 13 further comprising:

when C≦

SS where SS is the price of the company stock on the settlement date, exercising the call option in order to receive X number of shares of company stock and deliver to the executive X*C; and

when SS≦

P, exercising the put option in order to receive X number of shares of company stock and deliver to the executive X*P.

18. The method of claim 13 further comprising:

when C≦

SS, where SS is the price of the company stock on the settlement date, receiving from the executive X*(SS−

C); and

when SS≦

P, delivering X*(P−

SS) to the executive on the settlement date.

19. A method for protecting the value of compensatory employee options issued to an executive of a company, the employee options being stock options on company stock and having an employee option strike price, the method comprising:

hedging the employee options by buying a call option on company stock from the executive on a reference date and selling a put option on company stock to the executive on the reference date, the call option having a call strike price, the put option having a put strike price that is lower than the call strike price and higher than the employee option strike price, the call option expiring on a settlement date, the put option expiring on a date no later than the settlement date.

20. The method of claim 19 further comprising buying a second put option on company stock from the executive on the reference date, the second put option having a second put strike price substantially equal to or greater than the employee option strike price.

21. The method of claim 19 further comprising receiving a pledge of the employee options from the executive on the reference date.

22. The method of claim 19 further comprising receiving a deposit from the executive on the reference date, the deposit being substantially equal to the employee option strike price.

23. The method of claim 19 further comprising, on a date no later than the settlement date, loaning the executive an amount substantially equal to the put strike price.

24. The method of claim 19 further comprising receiving a power-of-attorney from the executive to exercise the employee options.

25. The method of claim 19 further comprising receiving approval from the company to allow the employee options to be non-forfeitable.

26. The method of claim 19 further comprising receiving approval from the company to allow the employee options to be assignable.

27. The method of claim 19 further comprising agreeing to buy shares of company stock underlying the employee options from the executive at an amount no less than the difference between the put strike price and the employee option strike price.

28. The method of claim 19 further comprising guaranteeing a net asset value to the executive on the settlement date, wherein the net asset value is no less than the difference between the put strike price and the employee option strike price, and no greater than the difference between the call strike price and the employee option strike price.

29. The method of claim 19 further comprising settling at least one option from the group consisting of the employee options, the call option, and the put option on the settlement date.

30. The method of claim 19 wherein the buying the call option comprises buying a call option on a first number of shares of company stock, and wherein the selling the put option comprises selling a put option on a second number of shares of company stock, the second number of shares being no greater than the first number of shares, the first number of shares being no greater than the number of shares of company stock corresponding to the employee options.

31. The method of claim 19 further comprising:

when the price of the company stock on the settlement date is greater than the call strike price, exercising the call option in order to receive a share of company stock and deliver to the executive the call strike price; and

when the price of the company stock on the settlement date is lower than the put strike price, exercising the put option in order to receive a share of company stock and deliver to the executive the put strike price.

32. The method of claim 19 further comprising:

when the price of the company stock on the settlement date is greater than the call strike price, receiving from the executive the difference between the price of the company stock on the settlement date and the call strike price; and

when the price of the company stock on the settlement date is lower than the put strike price, delivering to the executive the difference between the put strike price and the price of the company stock on the settlement date.

33. A method for protecting the value of compensatory employee options, the employee options being stock options on stock issued by a company and having an employee option strike price, the method comprising:

hedging the employee options by selling a call option on company stock to a counterparty on a reference date and buying a put option on company stock from the counterparty on the reference date, the call option having a call strike price, the put option having a put strike price that is lower than the call strike price and higher than the employee option strike price, the call option expiring on a settlement date, the put option expiring on a date no later than the settlement date.

34. The method of claim 33 further comprising selling a second put option on company stock to the counterparty on the reference date, the second put option having a second put strike price substantially equal to or greater than the employee option strike price.

35. The method of claim 33 further comprising pledging the employee options to the counterparty on the reference date.

36. The method of claim 33 further comprising depositing the employee option strike price with the counterparty on the reference date.

37. The method of claim 33 further comprising borrowing an amount substantially equal to the put strike price no later than the settlement date.

38. The method of claim 33 further comprising giving the counterparty a power-of-attorney to exercise the employee options.

39. The method of claim 33 further comprising receiving approval from the company to allow the employee options to be non-forfeitable.

40. The method of claim 33 further comprising receiving approval from the company to allow the employee options to be assignable.

41. The method of claim 33 further comprising agreeing to sell shares of company stock underlying the employee options to the counterparty for an amount no less than the difference between the put strike price and the employee option strike price.

42. The method of claim 33 further comprising being guaranteed a net asset value on the settlement date, wherein the net asset value is no less than the difference between the put strike price and the employee option strike price, and wherein the net asset value is no greater than the difference between the call strike price and the employee option strike price.

43. The method of claim 33 further comprising settling at least one option from the group consisting of the employee options, the call option, and the put option on the settlement date.

44. The method of claim 33 wherein the selling the call option comprises selling a call option on a first number of shares of company stock, and wherein the buying the put option comprises buying a put option on a second number of shares of company stock, the second number of shares being no greater than the first number of shares, the first number of shares being no greater than the number of shares of company stock corresponding to the employee options.

45. The method of claim 33 further comprising:

when the price of the company stock on the settlement date is greater than the call strike price, receiving the call strike price from the counterparty, exercising the employee options in order to receive shares of company stock, and delivering the shares of company stock to the counterparty; and

when the price of the company stock on the settlement date is lower than the put strike price, receiving the put strike price from the counterparty, exercising the employee options in order to receive shares of company stock, and delivering the shares of company stock to the counterparty.

46. The method of claim 33 further comprising:

when the price of the company stock on the settlement date is greater than the call strike price, delivering the difference between the price of the company stock on the settlement date and the call strike price to the counterparty; and

when the price of the company stock on the settlement date is lower than the put strike price, receiving the difference between the put strike price and the price of the company stock on the settlement date from the counterparty.

47. A method for protecting the value of compensatory employee options issued to an executive of a company, the employee options being stock options on company stock and having an employee option strike price, the method comprising:

hedging the employee options by establishing a collar on company stock on a reference date, the establishing the collar comprising exchanging call and put options on company stock, the call option having a call strike price, the put option having a put strike price that is lower than the call strike price and higher than the employee option strike price, the put option expiring on a date no later than the expiration date of the call option.

48. A method for protecting the value of compensatory employee options, the employee options being stock options on stock issued by a company and having an employee option strike price, the method comprising:

hedging the employee options by selling a call option on company stock to a first counterparty on a reference date and buying a put option on company stock from a second counterparty on the reference date, the call option having a call strike price, the put option having a put strike price that is lower than the call strike price and higher than the employee option strike price, the put option expiring on a date no later than the expiration date of the call option.

49. A system that protects the value of employee options issued to an executive of a company, the system comprising:

a plurality of workstations that electronically display transaction information to the executive and to a counterparty, the transaction information relating to hedge options and to the employee options, the hedge options including a call option on company stock and including a put option on company stock, the plurality of workstations including;

one workstation that is adapted to receive an offer to buy the put option from the executive and to present the offer to buy the put option to the counterparty; and

one workstation that is adapted to receive an offer to buy the call option from the counterparty and to present the offer to buy the call option to the executive;

a server coupled to the workstations that processes the transaction information and transaction instructions received from the executive and the counterparty; and

a clearing center coupled to the server, the clearing center that causes the transactions to be completed and cleared and for verifying that the transactions are completed and cleared.

50. The system of claim 49, the plurality of workstations further comprising one workstation that is adapted to receive an offer to sell a second put option on company stock from the executive and to present the offer to sell the second put option to the counterparty.

51. The system of claim 49, the server further comprising a calculation processor that determines the value of the call option and the value of the put option based on market conditions relating to the hedge options.

52. The system of claim 49, the server further comprising a transaction processor that is adapted to process a plurality of transactions between the executive and the counterparty.

53. The system of claim 49, the server further comprising a memory that stores transaction information relating to a plurality of transactions made between the executive and the counterparty.

54. The system of claim 49 wherein one of the plurality of workstations is adapted to receive a pledge of the employee options from the executive.

55. An apparatus that protects the value of employee options issued to an executive of a company, the apparatus comprising:

a server comprising;

a server storage device;

a server processor connected to the server storage device, the server storage device storing a server program for controlling the server processor; and

the server processor operative with the server program to transact the purchase and sale of hedge options between the executive and a counterparty, the hedge options including a call option on company stock and including a put option on company stock;

a plurality of workstations, each of the plurality of workstations operative to communicate with the server, each of the workstations comprising;

a workstation storage device;

a workstation processor connected to the workstation storage device, the workstation storage device storing a workstation program for controlling the workstation processor; and

the workstation processor operative with the workstation program to;

display transaction information to the executive or to the counterparty, the transaction information relating to the employee options and the hedge options;

receive an offer from the executive to buy the put option and to present the offer to buy the put option to the counterparty; and

receive an offer to buy the call option from the counterparty and to present the offer to buy the call option to the executive; and

a clearing center operative to communicate with the server, the clearing center comprising;

a clearing storage device;

a clearing processor connected to the clearing storage device, the clearing storage device that stores a clearing program for controlling the clearing processor; and

the clearing processor that is operative with the clearing program to cause the transactions to be completed and cleared and to verify that the transactions are completed and cleared.

56. The apparatus of claim 55 wherein the workstation processor is further operative with the workstation program to receive an offer to sell a second put option on company stock from the executive and to present the offer to sell the second put option to the counterparty.

57. The apparatus of claim 55, the server processor further comprising a calculation processor operative with the server program to determine the value of the call option and the value of the put option based on market conditions relating to the hedge options.

58. The apparatus of claim 55, the server processor further comprising a transaction processor operative with the server program to process a plurality of transactions between the executive and the counterparty.

59. The apparatus of claim 55 wherein the server storage device stores transaction information relating to a plurality of transactions made between the executive and the counterparty.

60. The apparatus of claim 55 wherein the workstation processor is adapted to receive a pledge of the employee options from the executive.