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Binomial Model

Alternative to the Black-Scholes model for determining the "fair value" of employee stock options. The Financial Accounting Standards Board (FASB) feels that the lattice models, such as the binomial, estimate fair value better because they can consider varying inputs (e.g. changes in volatility and not just one volatility rate) over the award term. Unlike Black-Scholes, this model allows you to assume that exercise can occur before the end of the term. Most experts believe it can produce a lower value for your options, depending on the assumptions (e.g. volatility, option-forfeiture rates).

Further reading about stock option valuation is available in the section Basics: Valuation & Expensing elsewhere on this website.

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