The common shares of Twitter, Inc. (TWTR) recently traded on the NYSE for $65 per share. You have employee stock options to purchase 1,000 TWTR shares for $70 per share. The options expire in three years.

Assume that the annualized volatility of TWTR stock is 55 percent and that the risk-free interest rate is 2.5 percent. (Assume the options are European options that may only be exercised at the maturity date.)

a. Is this option a call or a put?

b. Using an option pricing calculator such as the one at erieri.com/

blackscholes, estimate the value of your TWTR options.

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

d. What is the estimated value of the options if their maturity is three years, but TWTR’s volatility is 30 percent? Why does the value of the options decrease as volatility decreases? LO.1