I am a stuck on page 226 of schweser book they use an example of Park Glen. why when the employee exercises his options does the company’s cash go up by the number of options x exercise price. this partcular example 100 x $60 = $6,000 i just understand why the company’s cash goes up? how excatly does this work? advance apologies for being dull
Because it is a call option. A call option gives the owner the right to purchase the underlying (in this case stock in the company) for the exercise price. So when the employee exercises his option to buy a stock currently worth $100 for $60, the company gets $60 and the employee gets a share.
remember, usually the company doesnt go out and buy shares on the market, usually they sell of their current holdings. so cash comes in without going out
thanks guys! very helpful indeed