Blizzard 2015 Annual Report Download - page 80

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62
The following tables present the weighted-average assumptions and the weighted-average fair value at grant date using the
binomial-lattice model:
Employee and
Director Options
For the Years
Ended December 31,
2015
2014
2013
Expected life (in years) ...................................................................................
6.26
5.97
6.44
Risk free interest rate ......................................................................................
1.90%
1.82%
1.86%
Volatility .........................................................................................................
36.13%
37.09%
39.00%
Dividend yield ................................................................................................
0.72%
0.98%
1.08%
Weighted-average fair value at grant date ......................................................
$ 9.87
$ 5.87
$ 4.97
To estimate volatility for the binomial-lattice model, we use methods that consider the implied volatility method based upon the
volatilities for exchange-traded options on our stock to estimate short-term volatility, the historical method (annualized standard
deviation of the instantaneous returns on Activision Blizzard’s stock) during the option’s contractual term to estimate long-term
volatility, and a statistical model to estimate the transition or “mean reversion” from short-term volatility to long-term volatility. Based
on these methods, for options granted during the year ended December 31, 2015, the expected stock price volatility ranged from
26.96% to 37.00%.
As is the case for volatility, the risk-free rate is assumed to change during the option’s contractual term. Consistent with the
calculation required by a binomial-lattice model, the risk-free rate reflects the expected movement in the interest rate from one time
period to the next (“forward rate”) as opposed to the interest rate from the grant date to the given time period (“spot rate”). The
expected dividend yield assumption for options granted during the year ended December 31, 2015 is based on the Company’s
historical and expected future amount of dividend payouts.
The expected life of employee stock options represents the weighted-average period the stock options are expected to remain
outstanding and is an output from the binomial-lattice model. The expected life of employee stock options depends on all of the
underlying assumptions and calibration of our model. A binomial-lattice model can be viewed as assuming that employees will
exercise their options when the stock price equals or exceeds an exercise multiples, of which the multiple is based on historical
employee exercise behaviors.
As stock-based compensation expense recognized in the consolidated statement of operations for the years ended December 31, 2015,
2014, and 2013 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were
estimated based on historical experience.
Accuracy of Fair Value Estimates
We developed the assumptions used in the binomial-lattice model, including model inputs and measures of employees’ exercise and
post-vesting termination behavior. Our ability to accurately estimate the fair value of stock-based payment awards at the grant date
depends upon the accuracy of the model and our ability to accurately forecast model inputs as long as ten years into the future. These
inputs include, but are not limited to, expected stock price volatility, risk-free rate, dividend yield, and employee termination rates.
Although the fair value of employee stock options is determined using an option-pricing model, the estimates that are produced by this
model may not be indicative of the fair value observed between a willing buyer and a willing seller. Unfortunately, it is difficult to
determine if this is the case, as markets do not currently exist that permit the active trading of employee stock option and other
stock-based instruments.
10-K Activision_Master_032416_PrinterMarksAdded.pdf 62 3/24/16 11:00 PM