1. Consider a grant to CEO of 500,000 call options (at-the-money warrants on the firm's stock). Assume...
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Question:
- 1. Consider a grant to CEO of 500,000 call options (at-the-money warrants on the firm's stock). Assume that the options have 10 years to expiration, the firm's stock is currently trading at $63, variance of return on this stock is 0.04 (annualized), and the annual risk-free rate is 3%.
- 2. Find the value of this grant using a three period binomial tree.
- 3. Now redo the valuation in part (a) using probabilities of 0.4 for the up state and 0.6 for down state instead of the risk-neutral probabilities you calculated earlier.
Note: I recommend using Excel to solve the problem
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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