Blizzard 2007 Annual Report Download - page 93

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A C T I V I S I O N , I N C . • • 2 0 0 7 A N N U A L R E P O R T
post-vesting termination behavior so that the measures output by the model matched values of
these measures that were estimated from historical data. The weighted average estimated value of
employee stock options granted during the years ended March 31, 2007, 2006, and 2005 was $5.86,
$5.09, and $3.06 per share, respectively, using the binomial-lattice model with the following weighted
average assumptions:
Employee and Director
Options and Warrants
Employee Stock
Purchase Plan
For the year ended March 31, 2007 2006 2005 2007 2006 2005
Expected life (in years) 4.87 4.85 3.20 0.5 0.5 0.5
Risk free interest rate 4.99% 5.17% 3.25% 4.71% 3.05% 2.66%
Volatility 54% 48% 48% 43% 42% 46%
Dividend yield — — — — — —
Weighted average fair value
at grant date $5.86 $5.09 $3.06 $3.72 $3.11 $1.59
To estimate volatility for the binomial-lattice model, we use methods or capabilities that are dis-
cussed in SFAS 123R and SAB 107. These methods included 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’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 March 31, 2007, the expected stock
price volatility ranged from 38% to 56%, with a weighted average volatility of 54%. For options
granted during the year ended March 31, 2006, the expected stock price volatility ranged from
40% to 55%, with a weighted average volatility of 48%. For options granted during the year ended
March 31, 2005, the expected stock price volatility ranged from 45% to 48%, with a weighted
average volatility of 48%.
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 interest 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”). Since we do not currently pay dividends and
are not expected to pay them in the future, we have assumed that the dividend yield is zero.
The expected life of employee stock options represents the weighted average period the stock
options are expected to remain outstanding and is, as required by SFAS 123R, an output by the
binomial-lattice model. The expected life of employee stock options depends on all of the under-
lying 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 bound-
ary. The exercise boundary is not constant but continually declines as one approaches the option’s
expiration date. The exact placement of the exercise boundary depends on all of the model inputs
as well as the measures that are used to calibrate the model to estimated measures of employees’
exercise and termination behavior.
Notes to Consolidated Financial Statements