A firm gives all its employees American-style call options on the firm's stock. The options have a five- year life. The employees are not allowed to sell their options, but they can take long and short positions in the company's shares. As a result, if an employee does exercise his/her options, then he/she can sell the shares that they acquire. Which of the following statements is correct? Highly risk-averse investors are better off exercising a fraction of their options early and holding a portfolio containing the remaining options and the shares obtained by exercising. O If the firm will not pay any dividends during the next five years, then an employee considering exercising prior to maturity will always be better off by undertaking trades in the firm's stock and borrowing or lending. O Options are more volatile than the underlying stock. Thus, if the options are in-the-money, employees with high risk aversion will be better off exercising their options. O If an employee believes that a large dividend will be announced in one year's time, then that employee is better off exercising now so that he/she can benefit from the increase in the price of the firm's shares when the dividend is announced. If the options are currently in-the-money and an employee believes that the options will not be in-the-money in five years' time, then the employee's best strategy is to exercise their options early.
A firm gives all its employees American-style call options on the firm's stock. The options have a five- year life. The employees are not allowed to sell their options, but they can take long and short positions in the company's shares. As a result, if an employee does exercise his/her options, then he/she can sell the shares that they acquire. Which of the following statements is correct? Highly risk-averse investors are better off exercising a fraction of their options early and holding a portfolio containing the remaining options and the shares obtained by exercising. O If the firm will not pay any dividends during the next five years, then an employee considering exercising prior to maturity will always be better off by undertaking trades in the firm's stock and borrowing or lending. O Options are more volatile than the underlying stock. Thus, if the options are in-the-money, employees with high risk aversion will be better off exercising their options. O If an employee believes that a large dividend will be announced in one year's time, then that employee is better off exercising now so that he/she can benefit from the increase in the price of the firm's shares when the dividend is announced. If the options are currently in-the-money and an employee believes that the options will not be in-the-money in five years' time, then the employee's best strategy is to exercise their options early.
Chapter14: Property Transactions: Capital Gains And Losses, § 1231, And Recapture Provisions
Section: Chapter Questions
Problem 43P
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Transcribed Image Text:A firm gives all its employees American-style call options on the firm's stock. The options have a five-
year life. The employees are not allowed to sell their options, but they can take long and short
positions in the company's shares. As a result, if an employee does exercise his/her options, then
he/she can sell the shares that they acquire. Which of the following statements is correct?
O Highly risk-averse investors are better off exercising a fraction of their options early and holding a portfolio
containing the remaining options and the shares obtained by exercising.
O If the firm will not pay any dividends during the next five years, then an employee considering exercising prior
to maturity will always be better off by undertaking trades in the firm's stock and borrowing or lending.
O Options are more volatile than the underlying stock. Thus, if the options are in-the-money, employees with
high risk aversion will be better off exercising their options,
O If an employee believes that a large dividend will be announced in one year's time, then that employee is
better off exercising now so that he/she can benefit from the increase in the price of the firm's shares when
the dividend is announced.
O If the options are currently in-the-money and an employee believes that the options will not be in-the-money
in five years' time, then the employee's best strategy is to exercise their options early.
Transcribed Image Text:Which of the following is correct?
O A swap contract is an exchange-traded security.
O It is easy to arbitrage a structured note that is overvalued relative to its replicating portfolio by short-selling
the structured note
O Under the Modiglani-Miller assumptions, you can make a profit by appiying the Build-and-Break approach.
O A swap contract can be replicated by combining a position in the spot asset and money market account.
Structured notes provide an alternative investment opportunity for retail investors.
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