Digitek Corporation has 1 million shares outstanding, currently trading at $91 each share. The risk-free interest rate is 3 % per year. The standard deviation () of Digitek's stock returns is 32% a year. Mr. Brian has just become the CEO of the Digitek at the beginning of this year and been offered an incentive scheme based on the performance of the company's stocks. In the next 2 years, Mr. Brian will be paid a cash bonus of $25492 for every dollar that the company's stock price rises above $114 per share. Consider Mr. Brian's incentive scheme as a financial option. QUESTIONS 1. Is Mr. Brian's incentive scheme a call or a put option and what is his position (long or short) in this option? What is the underlying asset for this option? Is it an American or European type option? Is the option currently in-the-money or outof-the-money [4 marks] Mr. Brian's incentive scheme is similar to a (select one): Underlying asset of this option is Digitek's (select one): Type of the option (select one): Option is currently (select one): 2. Use the Black-Scholes option pricing model to estimate the value of each option. What is the total value of Mr. Brian's incentive scheme? [6 marks] Value of each option calculations (round your answers to four decimal places for N(d1),N(d2) ): N(d1)= N(d2)= Value of each option (round your answer to two decimal places) = Digitek Corporation has 1 million shares outstanding, currently trading at $91 each share. The risk-free interest rate is 3 % per year. The standard deviation () of Digitek's stock returns is 32% a year. Mr. Brian has just become the CEO of the Digitek at the beginning of this year and been offered an incentive scheme based on the performance of the company's stocks. In the next 2 years, Mr. Brian will be paid a cash bonus of $25492 for every dollar that the company's stock price rises above $114 per share. Consider Mr. Brian's incentive scheme as a financial option. QUESTIONS 1. Is Mr. Brian's incentive scheme a call or a put option and what is his position (long or short) in this option? What is the underlying asset for this option? Is it an American or European type option? Is the option currently in-the-money or outof-the-money [4 marks] Mr. Brian's incentive scheme is similar to a (select one): Underlying asset of this option is Digitek's (select one): Type of the option (select one): Option is currently (select one): 2. Use the Black-Scholes option pricing model to estimate the value of each option. What is the total value of Mr. Brian's incentive scheme? [6 marks] Value of each option calculations (round your answers to four decimal places for N(d1),N(d2) ): N(d1)= N(d2)= Value of each option (round your answer to two decimal places) =
