Gary Levin is the CEO of star Trading Company. The board of directors has just granted Mr. Levin 20,000 at-the-money European call options on the companys stock., which is currently trading at $50 per share. The stock pays no dividends. The options will expire in 4 years, and the annual standard deviation of the returns on the stock is 55%. Treasury bills that mature in 4 years currently yield a continuously compounded annual interest rate of 6%.

a) Use the Black-Scholes model to calculate the value of the stock options. (5 marks)

b) You are Mr. Levins financial advisor. He must choose between the previously mentioned stock option package and an immediate $450,000 bonus. If he is risk-neutral, which would you recommend? (2 marks)

c) How would your answer to (b) change if Mr. Levin were risk-averse and he could not sell the options prior to expiration? (2 mark)