Question
James E. is a new CEO of AFG firm. His six-year contract states that his compensation will include 10,700 at-the-money European call options on the
James E. is a new CEO of AFG firm. His six-year contract states that his compensation will include 10,700 at-the-money European call options on the companys stock that expire in three years. The current stock price is $45 per share, and the standard deviation of the returns on the firms stock is 75 percent. The company does not pay a dividend. Treasury bills that mature in three years yield a continuously compounded interest rate of 8 percent. Using the BlackScholes model to calculate the value of the stock options, determine the total value of the compensation package on the date the contract is signed.
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