Sally Jameson

In: Business and Management

Submitted By omarrocha
Words 319
Pages 2
Sally’s Compensation It’s the season for snow-melting, it’s the season for career interviews, and it’s also the season, hopefully, for lower unemployment rate. Sally Jameson, an MBA student graduated from the ivory tower HBS, is one of the lucky graduates and got a job from Telstar. Additionally, the generous employer offers her a special compensation package – she could choose either cash of $5,000 or 3,000 special options that allow her to buy as many as 3000 shares of Telstar’s stocks for $35.00 at her 5th anniversary employment. Today is May 27, 1992, we have a list of quotations of Short- and Long-term Call Options of Telstar stocks, a list of historical price and volatility of Telstar Common Stock since Jan, 82, and a list of T-bill security yields. Now we are here to help her make a choice. I. B-S Model for option pricing Today is the final day for Sally to make a choice, we relies on the famous Black-Scholes Model to price the options in the compensation. Before pricing, we need to know the volatility and the continuous compounded interest rate. For interest rate, we regard the 5 years T-bill bond yields as the “risk-free” rate and assume Sally and other investors of Telstar are risk-neutral. 1+5*BEY5yr=exp5r, where BEY5yr is the annualized Treasury Bill’s bond equivalent yield and r is the continuous compounded interest rate we want to derive, which is 5.2627%. Secondly, since historical volatility could not perfectly reflect the scenarios in the future, we use options prices that could reflect the investors’ expected volatility (due to the efficient market hypothesis). Moreover, as the volatility derived from long-term call options are more precise than that derived from short-term, we would use the 3 long term options with different strikes prices of $12.5, $17.5 and…...

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