Sally Jameson Valuing Stock Options Essay Essay Example

Sally Jameson Valuing Stock Options Essay Paper 1. If we ignore revenue enhancement consideration and presume that Sally Jameson is free to sell her options at any clip after she joins Telstar. which compensation bundle is worth more? First scenario. if Sally chooses stock options and keep until adulthood day of the month. Ignoring the revenue enhancement and other restraints. the future value of hard currency compensation at the terminal of the fifth twelvemonth will be 5000 * ( 1 + 0. 0602 ) ^ 5 = 6697. 44. We can easy organize the equation 3000 * ( P – 35 ) = 6697. 44. where P is the future stock monetary value of Telstar. so the stock monetary value must increase to at least 37. 23 at the terminal of 5th twelvemonth to acquire the same sum of the hard currency compensation and if the stock monetary value where to remain below 35. Sally’ option would be deserving nil. The stock. which pays no dividend and is non expected to pay one in the foreseeable hereafter. is merchandising at 18. 75. We will write a custom essay sample on Sally Jameson Valuing Stock Options Essay specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Sally Jameson Valuing Stock Options Essay specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Sally Jameson Valuing Stock Options Essay specifically for you FOR ONLY $16.38 $13.9/page Hire Writer It seems important difference between the exercising monetary value and the topographic point monetary value. As shown in Exhibit 2. Telstar stock monetary value has increased higher than $ 35 merely one time and 10-year mean stock monetary value is around 20. Therefore. the opportunity that the value of option is greater than the hard currency compensation is really rare. Second scenario. presume Sally is free to sell options at any clip after her connection Telstar. she may sell her option instantly after having. Then we try to monetary value the value of stock option by utilizing Black – Scholes Model. We know that the stock is presently merchandising at $ 18. 75 and the exercising monetary value is $ 35. We take the 5 twelvemonth T-bill rate 6. 02 % as the hazard free rate. From the Exhibit 2. we can cipher the volatility of Telstar stock return is around 27. 65 % . Plug them into the expression. the call option monetary value will be 2. 53. At this sum. Sally’s options would be soon deserving 2. 53 * 3000 = 7590. She is better off taking the option. 2. How should we factor in the complications ignored in inquiry 1? How would they impact the value of the option to Ms. Jameson? What should she make? Why? In sing revenue enhancements. dealing costs and trouble of option liquidness. we conclude that hard currency bundle is worth more than stock option bundle and hence. it is suggested that Sally take hard currency bundle. The revenue enhancement impact computation: Taking history of the computation above and following uncertainnesss that exist if Sally selects stock option. we consider it is better for her to take subscribing fillip. The likeliness that stock monetary value exceeds USD 37. 28 is low. From the exhibit 2. we note that ceiling of Telstar Common Stock seems to be about USD 35. Uncertain factors from the clip value and other hazard points in the hereafter. If Ms. Jameson leaves Telstar during the vesting period ( salary reaches a certain degree. they need more preparation as wagess. Because preparation can supply better calling developments and labour value. 4. What if Ms. Jameson decided that the option was a better trade. but she did non desire to hold all her fiscal wealth ( every bit good as her human capital ) tied to the lucks of Telstar? Assuming she works at Telstar and accepts the option grant. is at that place anything she could make to unbrace some of her fiscal wealth from Telstar? Although the option sounded a good pick. if Sally did non desire to hold all her fiscal wealth ( every bit good as her human capital ) tied to the lucks of Telstar. she had better take the hard currency instead than the option. Because the option was a better trade depended on a fact that the volatility was computed on the base of 10 old ages. There was a really large opportunity that in less than 5 old ages or even merely 1 or 2 old ages. the volatility would much less than the figure we computed earlier. as the twelvemonth 1988 had contributed the biggest volatility because of economic system grounds. It means that the value of the option tended to be valueless in short clip if the stock monetary value happened to public presentation steadily. Assuming Sally works at Telstar and accepts the option grant. she can sell some of her options when the monetary value exceed 5000/3000=1. 67 or put to death some of her options when the stock monetary value is above $ 35. Sally could maintain a part of the stock options and merchandise some in the market. That would somehow untie some of her fiscal wealth from Telstar.