13 Share-based payments
Details of the options held by directors and employees under the group’s share option schemes are given in the report of the remuneration committee.
Group and company – equity-settled option scheme
The following information is relevant in the determination of the fair value of options granted during the year under the equity-settled option scheme operated by the group. No options were granted during 2008. This is a new scheme separate to the performance share plan and other option schemes as disclosed in the report of the remuneration committee. The directors are not entitled to any awards under the scheme.
| 2009 | 2008 | |
|---|---|---|
| Option pricing model used | Binomial lattice | – |
| Share price at date of grant | £6.10 | – |
| Exercise price | £6.10 | – |
| Number granted | 69,500 | – |
| Number lapsed in the year | 5,000 | – |
| Contractual life | 10 years | – |
| Risk free interest rate | 2.7% | – |
| Volatility | 37% | – |
| Dividend yield | 4.0% | – |
For the 2009 grant, additional assumptions have been made that there is no employee turnover and 50% of employees exercise early when the share options are 20% in the money and 50% of employees exercise early when the share options are 100% in the money.
The volatility assumption, measured at the standard deviation of expected share price returns, is based on a statistical analysis of daily prices over the last three years.
There were 64,500 options exercisable at 31st December 2009 (2008: nil).
Group – cash-settled option scheme
All options relating to the cash-settled option scheme arose as a result of the acquisition of London Merchant Securities plc.
A binomial lattice pricing model was used to value the cash-settled options. The closing share price at 31st December 2009 of £13.20 (2008: £7.25) and a dividend yield of 1.9% (2008: 3%) were used together with risk-free interest rates of between 0.5% and 2.3% (2008: between 1.7% and 2.6%) depending on the term of the options.
Due to the small number of individuals who have been granted these options, an assumption of zero employee turnover has been made. Additionally, volatilities of 58% pa, 49% pa and 40% pa (2008: 48% pa, 38% pa and 31% pa) have been used for options with lives of one year, three years and five years (and over), respectively.
In general, the value of an option is affected by how quickly employees are assumed to exercise their awards after vesting. In this case, however, given the other assumptions, the share price at the 31st December 2009, and the fact that the expected lives of the options are relatively short, the fair values are not sensitive to this assumption. It has been assumed that employees try to maximise their returns and therefore do not exercise their options immediately, but tend to exercise their options later at the financially optimal date.