1. 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%.
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3. 2. Find the value of this grant using a three period binomial tree.
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5. 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

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To value the CEOs grant of 500000 call options using a threeperiod binomial tree we can follow these ... View the full answer