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Answer: Because vanilla executive stock options (i.e., ESOs with a fixed strike price) profit when the company's stock increases, ESOs are an optimal tool for aligning a public company's executive compensation with its shareholders, and for rewarding performance relative to industry peers
Hull would most strongly disagree with **C**. His view is that vanilla executive stock options with a fixed strike price are **not** an optimal incentive mechanism because they can: - reward managers for broad market or industry gains they did not create, - encourage excessive risk-taking, - and fail to align pay tightly with true shareholder value creation. While statement **D** has a definitional issue, the strongest and most direct disagreement with Hull’s discussion of ESOs is **C**.
Author: Manit Arora
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Q-608.3. In regard to option markets, with which of the following statements would John Hull most DISAGREE?
A
If an investor sells a stock at a loss then buys a call option within 30 days, the "wash sale rule" disallows the loss as a tax deduction
B
Convertible bonds (aka, convertibles) are bonds issued by a company that can be converted into equity at certain times using a predetermined exchange ratio.; therefore, they are therefore bonds with an embedded call option on the company’s stock.
C
Because vanilla executive stock options (i.e., ESOs with a fixed strike price) profit when the company's stock increases, ESOs are an optimal tool for aligning a public company's executive compensation with its shareholders, and for rewarding performance relative to industry peers
D
Warrants are options issued by a financial institution or nonfinancial corporation. A common use of warrants by a nonfinancial corporation is at the time of a bond issue; the corporation issues call warrants on its own stock and then attaches them to the bond issue to make it more attractive to investors
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