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Executive compensation is usually made up of a base salary plus some of other elements such as long- term compensation, annual bonuses, retirement contributions and
Executive compensation is usually made up of a base salary plus some of other elements such as long- term compensation, annual bonuses, retirement contributions and options. Options is by far the biggest part of total compensation for many top executives. The CEO of Capital Two, was granted 1.754 million stock option and the average exercise price of the option was $65.40, and we will assume that all the options were granted at the money. Options are assumed to expire in 6 years with annual stock volatility at 35.55% and the risk-free rate is 2%. The stock price (S) is implied to be equal as the strike price (E). The reported option value was $21.52 million. c) Call options on Capital Two can be purchased on the Chicago Board Options Exchange but Capital Two does not issue (that is, sell) call options on its common stock. Discuss who would be the original buyers and sellers on this call option? Illustrate the possible transaction between these sellers and buyers. [6 marks] d) How could you explain the call option is "out of money? [4 marks]
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