Enron Corp. - University of California | Office of The President

executives will be generally hesitant to exercise an option well in advance of the expiration date
of the option, since an early option exercise forfeits the time value of the option and will only be
rationally exercised when the market price is at least four times the strike price.
409. Indeed, the rational executive will rarely forfeit more than a modest amount of the
value of an option partly because it is unnecessary to do so. Asset liquidity or diversification can be
achieved by financial instruments readily available and commonly used by executives. For example,
executives commonly protect themselves from risk by the use of put options, call options, zero cost
collars, and equity swaps. These instruments are readily available, commonly used, and can be
obtained easily. Information regarding these options is readily available to these executives through
financial advisors and is part of the course work involved in obtaining business degrees.
410. Indeed, such instruments were used in this case. In particular, Belfer entered into zero
cost collars during the end of 00 and beginning of 01 covering 1,000,000 of his shares. These collars
cost Belfer no cash to put into place and locked in a guaranteed minimum price for his shares of
between $55.53 and $65.70 and provided this protection until the later part of 03. Belfer was
costlessly ensured that he would be able to sell his Enron stock at inflated prices at any time through
the later part of 03. Hence, while many Enron employees have lost their entire pensions and many
stockholders have seen their Enron investments completely vanish, Belfer is now presently
contractually entitled to trade his worthless Enron shares for approximately $60 million pursuant to
these collars.
411. Should the holder of an executive option exercise his options on a particular date, an
expert can determine the expected financial loss to the executive as compared with not exercising
the option. This loss can be compared to empirically derived risk premiums to determine whether
the executive's exercise can be explained as either (1) within the range of rational option exercises
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