The common shares of Applied Materials (Amat) are trading today on the NASDAQ for $72 a share. You have employee stock options to purchase 1,000 Amat shares for $66 a share. The options mature in four years. The annualized volatility of Amat stock over the past 100 days has been 61 percent. The company does not pay dividends, and the interest rate is 8 percent.

a. Using the option pricer website mentioned in the appendix, estimate the value of your Amat options.

b. What is the estimated value of the options if their maturity is four months instead of four years? Why does the value of the options decline as the maturity declines?

c. What is the estimated value of the options if their maturity is four years but Amat's volatility is 32 percent? Why does the value of the options decline as volatility declines?

AppendixLO1