Many firms offer stock options to high-level executives. These options are not valuable to the employee unless the stock price rises high enough so that the options are “in the money”.

a. (7 points) Why might a firm offer stock options? How do stock options address the agency problem? Briefly explain. b. (13 points) What implications do the granting of options have for the incentives and risk facing the employee? Briefly explain. c. (13 points) Should options be granted only to high-level executives, or can they effectively be used at all levels of the organization? Briefly explain. (Your answer should include a brief discussion of measuring performance).