Question 1: What are the main differences between a typical employee stock option and an American call option traded on an exchange or in the over-the-counter market?

Question 2: Explain why employee stock options on a non-dividend-paying stock are frequently exercised before the end of their lives whereas an exchange-traded call option on such a stock is never exercised early.

Question 3: On May 31 a companys stock price is $70. One million shares are outstanding. An executive exercises 100,000 stock options with a strike price of $50. What is the impact of this on the stock price?

Question 4: What is the (risk-neutral) expected life for the employee stock option in Example 16.2? What is the value of the option obtained by using this expected life in Black-Scholes- Merton?

Question 5:

(a) Hedge funds earn a management fee plus an incentive fee that is a percentage of the profits, if any, that they generate (see Business Snapshot 1.3). How is a fund manager motivated to behave with this type of compensation package?

(b) "Granting options to an executive gives the executive the same type of compensation package as a hedge fund manager and motivates him or her to behave in the same way as a hedge fund manager" Discuss this statement.