Refer to the attachment. Give detailed explanations.

Question 2 A company's directors have decided to provide senior managers with a performance bonus scheme. The bonus scheme entitles the managers to a cash payment of $10,000 should the company share price have increased by more than 20% at the end of the next 6 months. In addition, the managers will be entitled to 5,000 free shares each, should the share price have increased by more than 10% at the end of the next 6 months. You are given the following data: Current share price 17.81 Risk-free rate 5% pa (continuously-compounded) Share price volatility 25% pa No dividends to be paid over the next 6 months. (i) By considering the terms of the Black-Scholes call option pricing formula, calculate the value of the bonus scheme to one manager. [6] (ii) Explain the main disadvantages of this bonus scheme as an incentive for managers to perform. [2] (iii) Some shareholders are concerned that this scheme might cause an undesirable distortion to the managers' behaviour. Suggest some modifications to the scheme that will ensure that the managers' aims coincide with the long-term objectives of the shareholders. [3] [Total 1 1]Question 1 A building society issues a one-year bond that entitles the holder to the return on a weighted-average share index (ABC500) up to a maximum level of 30% growth over the year. The bond has a guaranteed minimum level of return so that investors will receive at least x% of their initial investment back. Investors cannot redeem their bonds prior to the end of the year. (i) Explain how the building society can use a combination of call and put options to prevent making a loss on these bonds. [4] (ii) The volatility of the ABC500 index is 30% pa and the continuously- compounded risk-free rate of return is 4% pa. Assuming no dividends, use the Black-Scholes pricing formulae to determine the value of x (to the nearest 1%) that the building society should choose to make neither a profit nor a loss. [6] [Total 10]