Sally Jameson Stock Options

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Student Number: Assignment Title: Course Code: Course Title: Section #: 999346845 Assignment 16 RSM 1331 Finance I: Capital Markets & Valuation 1 2 AM 3 PM 4 5 In submitting this work for grading, I confirm: • That the work is original, and due credit is given to others where appropriate • Acceptance and acknowledgement that assignments found to be plagiarized in any way will be subject to sanctions under the University’s Code of Behaviour on Academic Matters. Please pay attention to the course outline for specific formatting requirements set by instructors. Assignments are to be submitted using student ID numbers only; do not include your name. Please note that assignments that include names or that do not have the box below checked…show more content…
As can be seen in the table above, the average volatility implied in the prices at which long-term Telstar call options are trading is 35.900%. This is the estimated volatility I intend to use in my calculation of Sally’s stock options. 4. What is your estimate of the value of Sally’s ESO package? If you were to take the options and gamble on the stock price going forward, what percentage of the time do you think you would make more than what Black Scholes calculates? CALL OPTIONS: Telstar Communications S: Stock Price ($) $ 18.75000 X: Strike or Exercise Price ($) $ 35.00000 T: Time to Maturity (years) 5.00000 r: Annual Interest Rate 0.06020 s: Annual Standard Deviation 0.35900 d: Asset Yield - • • Entering the above parameters into the Black Scholes Calculator yields an option price of $3.908 for the ESOs being offered to Sally. Assuming the Black Scholes Option Valuation Model provides the mean valuation from a distribution of equally likely price paths, I would imagine that I would make more than what Black Scholes calculates half the time, and less half the time. 5. What should Sally do? Why? • • • • Cash being offered: $5000.000 Value of Executive Stock Options: $3.908 x 3,000 = $11,724.000 It thus appears that the value of the ESOs being offered to Sally is more than twice the value of the cash being offered to her. Having said that, it’s worthwhile noting

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