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Q3: (12+4+4-20 Marks] Mr. Sanjay Singh is the CEO of BNP Sundaram Paribas. The board of directors has granted Mr. Singh 25,000 at-the-money European
Q3: (12+4+4-20 Marks] Mr. Sanjay Singh is the CEO of BNP Sundaram Paribas. The board of directors has granted Mr. Singh 25,000 at-the-money European call options of the company's stock, which is currently trading at $55 per share. The stock pays no dividend. The options will expire in five years, and the standard deviation in the stock returns is 61%. The risk-free rate of interest is 6% with continuous compounding. (a) Use Black-Scholes model to calculate the value of the stock options. (b) You are Mr. Singh's financial adviser. He must choose between the previously mentioned stock option package and an immediate $750,000 bonus. If he is risk neutral, which would you recommend? (c) How would you answer (b) if Mr. Singh were risk-averse and he could not sell the options prior to expiration?
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