discovered out of bloghopping

as i was bloghopping at 2 in the morning, i came across this blog called Journeys of a Bumbling Investor. considering my guilty pleasure in finance, i found it one of the more interesting blogs. the more wonderful thing was, it led me to this finance/accounting site. about 30 minutes to an hour was spent reading up on expensing stock options, the black scholes model, and steve jobs' commencement address last june 12, 2005 to the graduates of stanford university. here are some excerpts:

Corporations are feeling the pressure to classify stock options as an expense, as shareholders across the globe lobby for increased transparency in the wake of the Enron and WorldCom accounting scandals.

Typically, an option plan gives employees the right to buy company stock at a certain price - the strike price - which is usually the market price on the date of the grant of the options.

Under current US accounting rules, companies can choose whether to deduct option costs from expenses or disclose them in the footnotes.

Proponents argue that if we don't require expensing, companies will go on showering top executives with outlandish option awards worth millions.

Opponents argue that they are an effective recruitment and retention tool and that, if expensed, would hurt most employees and not senior executives. They argue that senior executives looking at the bottom-line will simply cut out broad-based stock option plans.

Initial research indicates that as companies begin expensing options, they are almost certain to get stingier about handing them out because it will hurt their bottom line.

and in 2004...

The nation's accounting-rule makers unveiled their long-awaited proposal to require that employee stock-option compensation be treated as an expense on corporate income statements, starting next year.

The proposed rules by the Financial Accounting Standards Board promise to considerably alter investors' perceptions of many companies' financial performance by reducing the figures that companies report for earnings and -- in a previously unreported twist -- operating cash flows.

you can opt to stop reading this if you find this too uninteresting and/or geeky. however, the fact that you reached this part tells me that there must have been some spark of interest on your side. anyway, here's something on options, whose value [specifically, european type put and call stock options] is computed by black scholes model:

The idea of options is certainly not new. Ancient Romans, Grecians, and Phoenicians traded options against outgoing cargoes from their local seaports.

When used in relation to financial instruments, options are generally defined as a "contract between two parties in which one party has the right but not the obligation to do something, usually to buy or sell some underlying asset".

Having rights without obligations has financial value, so option holders must purchase these rights, making them assets. This asset derives their value from some other asset, so they are called derivative assets.

Call options are contracts giving the option holder the right to buy something, while put options, conversely entitle the holder to sell something.

Payment for call and put options, takes the form of a flat, up-front sum called a premium.

and that's all for finance now. and learning. and nerdness.

excerpts taken from here.