Risk Assessment & Underwriting Flashcards

A company is evaluating whether to allow early exercise of employee stock options. Which risk is MOST directly introduced by permitting early exercise?

Answer: Dilution risk from immediate share issuance

Early exercise causes immediate share issuance, increasing outstanding shares and diluting existing shareholders sooner than anticipated.

Under Black-Scholes option pricing, which input has the GREATEST sensitivity impact on an at-the-money option's value when the option has a long time to expiration?

Answer: Volatility

For long-dated at-the-money options, volatility (vega) typically has the greatest sensitivity impact on option value.

A company conducting a tender offer for underwater stock options must consider which primary underwriting risk?

Answer: The risk that employees accept at a higher rate than modeled

If acceptance rates exceed projections, the company faces higher-than-budgeted cash outflows or share usage to fund the offer.

Which of the following BEST describes 'concentration risk' in the context of an employee equity plan?

Answer: Risk that equity awards are concentrated among too few senior executives

Concentration risk arises when equity compensation is heavily weighted toward a small group, creating governance and retention exposure if those individuals leave.

An ESPP with a lookback provision and 15% discount exposes the company to which type of accounting risk?

Answer: Risk of understating the compensation expense due to the lookback feature

The lookback feature is a compensatory element that increases the grant-date fair value and must be fully expensed; failure to capture it understates compensation cost.

When assessing forfeiture risk for an equity plan, which data source is MOST reliable for estimating future forfeitures?

Answer: The company's own historical forfeiture experience by employee group

ASC 718 requires entities to use estimates based on historical company-specific data, adjusted for expected changes, to estimate forfeitures.

A stock plan administrator discovers that a terminated employee exercised options during a blackout period. Which risk category does this scenario PRIMARILY represent?

Answer: Operational risk

Exercising during a blackout period due to a process or control failure is an operational risk—a breakdown in internal controls and procedures.