14 Employee Share Options Joseph-Benoit Suvee has just been named the new chief executive officer of BluBell Fitness NV. In addition to an annual salary of €400,000, his three-year contract states that his compensation will include 10,000 at-the-money European call options on the company’s shares that expire in three years. The current share price is €40 per share, and the standard deviation of the returns on the firm’s equity is 68 per cent. The company does not pay a dividend. Treasury bills that mature in three years yield a continuously compounded interest rate of 5 per cent. Assume that Mr Suvee’s annual salary payments occur at the end of the year and that these cash flows should be discounted at a rate of 9 per cent. Using the Black–

Scholes model to calculate the value of the share options, determine the total value of the compensation package on the date the contract is signed.