Employee Stock Options Jared Lazarus has just been named the new chief executive offi cer of BluBell Fitness Centers, Inc. 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 stock that expire in three years. The current stock price is $40 per share, and the standard deviation of the returns on the fi rm’s stock is 68 percent. The company does not pay a dividend. Treasury bills that mature in three years yield a continuously compounded interest rate of 5 percent. Assume that Mr. Lazarus’s annual salary payments occur at the end of the year and that these cash fl ows should be discounted at a rate of 9 percent. Using the Black–Scholes model to calculate the value of the stock options, determine the total value of the compensation package on the date the contract is signed. LO.1