Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You
Question:
Suppose you hold LLL employee stock options representing options to buy 10,000 shares of LLL stock. You wish to hedge your position by buying put options with three-month expirations and a $22.50 strike price. How many put option contracts are required? Use the same assumptions specified in Problem 17. (That such a trade may not be permitted by the covenants of many ESO plans. Even if the trade were permitted, it could be considered unethical.)
Data From Problem 17
In its 10Q dated February 4, 2016, LLL, Inc., had outstanding employee stock options representing over 272 million shares of its stock. LLL accountants estimated the value of these options using the Black-Scholes-Merton formula and the following assumptions:
S = current stock price = $20.72
K = option strike price = $23.15
r = risk-free interest rate = 0.043
σ = stock volatility = 0.29
T = time to expiration = 3.5 years
What was the estimated value of these employee stock options per share of stock? (LLL pays no dividends.)
In finance, the strike price of an option is the fixed price at which the owner of the option can buy, or sell, the underlying security or commodity.
Step by Step Answer:
Fundamentals of Investments, Valuation and Management
ISBN: 978-1259720697
8th edition
Authors: Bradford Jordan, Thomas Miller, Steve Dolvin