Question

Examine the Annual Financial Statement of a company to determine their use of option contracts.

• What is the company you have selected?
• What is the company using their option contract for?
• What is the value of the option contract in the Annual Statements?
• Copy/paste a picture of the value from the financial statements.
• Imagine you are a retiree from this company and received stock as part of your pension package benefit. What would you do with the shares to earn extra money above the dividends?

Answer 1

Option Contracts :

Option Contract is a contract between the buyer and seller, where the seller and buyer agrees to sell or buy a stock at a agreed price at a date mutually agreed upon.

Mostly this is followed in Stocks and Real Estate business.

Common type of option contract is Employee Stock Option Scheme. Under this scheme, the shares will be offered to the entity's certain class of existing employees at a discounted price for specified period of time. The employees have the right to subscribe for the shares after some period called as vesting period. This helps both company and the share holder. Once the vesting period is over, the employee has the right to subscribe the share and sell the same if the market price is more than the discounted price offered by the company. If the share price does not increase, the employee can hold the shares and sell it when there is increase.

1) Company Selected : Hindustan Construction Company.

2) Option Contract Used for : Shares - Employee Stock Options Schemes (ESOP)

3) Value of Option Contract : Rs.31.15/Share

4) Employees Stock Options (ESOPs)

a) As on March 31, 2018, the number of options granted (yet to be vested), which are outstanding is 3,00,000 in aggregate, for exercise as per the exercise schedule and are exercisable at a price of ` 31.15 per stock option and the same is subject to approval of the shareholders for amendment of the existing Scheme, in line with SEBI (Share Based Employee Benefits) Regulations, 2014.

b) Each option, when exercised, as per the exercise schedule, would entitle the holder to subscribe for one equity share of the Company of face value `1 each.

c) During the year under review, no options were vested and exercised by the eligible employees of the Company.

5) Things to do with shares to earn extra money above the dividends :

As a retiree who has been offered stock as a part of pension package, I shall sell the shares when there is demand for the shares at a higher price and profit from the same. If there is no increase, I shall hold till the price increases and sell in the market.