Question
Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $500,000, his
Jared Lazarus has just been named the new chief executive officer of BluBell Fitness Centers, Inc. In addition to an annual salary of $500,000, his three-year contract states that his compensation will include 10,000 at-the-money European call options on the companys stock that expire in three years. Blubells current stock price is $30 per share, and the annual variance of the continuously compounded returns on the firms stock is 0.1225. Blubell pays no dividends. Treasury bills that mature in three years yield a continuously compounded interest rate of 5 percent per annum. Assume that Jareds annual salary payments occur at the end of the year and that these cash flows should be discounted at a rate of 10 percent per annum. Using the Black-Scholes model to calculate the value of the stock options, determine the total value of Jareds compensation package on the date the contract is signed.
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