Blizzard 2009 Annual Report Download - page 87
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liferangingfrom3.22yearsto4.71years,(d)riskadjustedstockreturnof8.89%,and(e)anexpected
dividendyieldof0.0%.
Toestimatevolatilityforthebinomiallatticemodel,weusemethodsthatconsidertheimplied
volatilitymethodbaseduponthevolatilitiesforexchangetradedoptionsonourstocktoestimateshort
termvolatility,thehistoricalmethod(annualizedstandarddeviationoftheinstantaneousreturnson
ActivisionBlizzard’sstock)duringtheoption’scontractualtermtoestimatelongtermvolatility,anda
statisticalmodeltoestimatethetransitionor“meanreversion”fromshorttermvolatilitytolongterm
volatility.Basedonthesemethods,foroptionsgrantedduringtheyearendedDecember31,2009,the
expectedstockpricevolatilityrangedfrom41.56%to60.77%.
Asisthecaseforvolatility,theriskfreerateisassumedtochangeduringtheoption’scontractual
term.Consistentwiththecalculationrequiredbyabinomiallatticemodel,theriskfreeratereflectsthe
interestfromonetimeperiodtothenext(“forwardrate”)asopposedtotheinterestratefromthegrantdate
tothegiventimeperiod(“spotrate”).Sincewehavenothistoricallypaiddividends,wehaveassumedthat
thedividendyieldiszero.OurfutureanalysiswillreflecttheCompany’sexpectationonpayingdividends
annuallysubsequenttoDecember31,2009.
Theexpectedlifeofemployeestockoptionsrepresentstheweightedaverageperiodthestock
optionsareexpectedtoremainoutstandingandisanoutputfromthebinomiallatticemodel.Theexpected
lifeofemployeestockoptionsdependsonalloftheunderlyingassumptionsandcalibrationofourmodel.
Abinomiallatticemodelcanbeviewedasassumingthatemployeeswillexercisetheiroptionswhenthe
stockpriceequalsorexceedsanexerciseboundary.Theexerciseboundaryisnotconstant,butcontinually
declinesastheoption’sexpirationdateapproaches.Theexactplacementoftheexerciseboundarydepends
onallofthemodelinputsaswellasthemeasuresthatareusedtocalibratethemodeltoestimatedmeasures
ofemployees’exerciseandterminationbehavior.
Asstockbasedcompensationexpenserecognizedintheconsolidatedstatementofoperationsfor
theyearendedDecember31,2009isbasedonawardsultimatelyexpectedtovest,ithasbeenreducedfor
estimatedforfeitures.Forfeituresareestimatedatthetimeofgrantandrevised,ifnecessary,insubsequent
periodsifactualforfeituresdifferfromthoseestimates.Forfeitureswereestimatedbasedonhistorical
experience.
AccuracyofFairValueEstimates
Wedevelopedtheassumptionsusedinthebinomiallatticemodel,includingmodelinputsand
measuresofemployees’exerciseandpostvestingterminationbehavior.Ourabilitytoaccuratelyestimate
thefairvalueofsharebasedpaymentawardsatthegrantdatedependsupontheaccuracyofthemodeland
ourabilitytoaccuratelyforecastmodelinputsaslongastenyearsintothefuture.Theseinputsinclude,but
arenotlimitedto,expectedstockpricevolatility,riskfreerate,dividendyield,andemployeetermination
rates.Althoughthefairvalueofemployeestockoptionsisdeterminedusinganoptionpricingmodel,the
estimatesthatareproducedbythismodelmaynotbeindicativeofthefairvalueobservedbetweena
willingbuyerandawillingseller.Unfortunately,itisdifficulttodetermineifthisisthecase,asmarketsdo
notcurrentlyexistthatpermittheactivetradingofemployeestockoptionandothersharebased
instruments.