BP 2005 Annual Report Download - page 101

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45 Share-based payments continued
FAIR VALUES AND ASSOCIATED DETAILS FOR OPTIONS AND SHARES GRANTED
ShareSave ShareSave
Options granted in 2005 BPSOP 3 year 5 year
Option pricing model used Binomial Binomial Binomial
Weighted average fair value $2.34 $2.76 $2.94
Weighted average share price $10.85 $10.49 $10.49
Weighted average exercise price $10.63 $7.96 $7.96
Expected volatility 18% 18% 18%
Option life 10 years 3.5 years 5.5 years
Expected dividends 2.72% 3.00% 3.00%
Risk free interest rate 4.25% 4.00% 4.25%
Expected exercise behaviour 5% years 4-9 100% year 4 100% year 6
70% year 10
EDIP ShareSave ShareSave
Options granted in 2004 Options BPSOP 3 year 5 year
Option pricing model used Binomial Binomial Binomial Binomial
Weighted average fair value $1.34 $1.55 $1.94 $2.13
Weighted average share price $8.09 $8.12 $8.75 $8.75
Weighted average exercise price $8.09 $8.09 $7.00 $7.00
Expected volatility 22% 22% 22% 22%
Option life 7 years 10 years 3.5 years 5.5 years
Expected dividends 3.75% 3.75% 3.75% 3.75%
Risk free interest rate 3.50% 4.00% 3.00% 3.75%
Expected exercise behaviour 5% years 2-6 5% years 4-9 100% year 4 100% year 6
75% year 7 70% year 10
EDIP ShareSave ShareSave
Options granted in 2003 Options BPSOP 3 year 5 year
Option pricing model used Binomial Binomial Binomial Binomial
Weighted average fair value $1.37 $1.50 $1.91 $2.02
Weighted average share price $6.29 $6.43 $7.23 $7.23
Weighted average exercise price $6.29 $6.35 $5.79 $5.79
Expected volatility 30% 30% 30% 30%
Option life 7 years 10 years 3.5 years 5.5 years
Expected dividends 4.00% 4.00% 4.00% 4.00%
Risk free interest rate 3.50% 3.50% 3.50% 3.50%
Expected exercise behaviour 5% years 2-6 5% years 4-9 100% year 4 100% year 6
75% year 7 70% year 10
The group uses a third party estimate of expected volatility of US ADSs for the quarter within which the grant date of the relevant plan falls. This
estimate takes into account the volatility implied by options in the market.
MTPP – MTPP – EDIP – EDIP –
Shares granted in 2005 TSR FCF TSR LTL RSP
Number of equity instruments granted (million) 9.3 8.4 3.7 0.5 0.3
Weighted average fair value $5.72 $11.04 $3.87 $10.13 $11.04
Fair value measurement basis Monte Carlo Market value Monte Carlo Market value Market value
The group used a Monte Carlo simulation to fair value the TSR element of the 2005 MTPP and EDIP plans. In accordance with the rules of the
plans the model simulates BP’s TSR and compares it against our principal strategic competitors over the three-year period of the plans. The model
takes into account the historic dividends, share price volatilities and covariances of BP and each comparator company to produce a predicted
distribution of relative share performance. This is applied to the reward criteria to give an expected value of the TSR element.
BP Annual Report and Accounts 2005 99