Black-Scholes Formula: C = S N(d1) - X e-rT N(d2)

d1 = [ln(S/X) + (r + 1/2σ2)T] / √σ2T

d2 = d1 - √σ2T

(i) (ii)
Current Asset Price : (S) 55.000 55.000
Strike Price of Call: (X) 55.000 60.000
Rf(Annual) : ( r ) 0.100 0.100
Variance(/yr) :(σ)^2 0.250 0.250
Time(yrs) to Expiration: (T) 3.000 3.000

From the Formula above: C= 24.051 22.401

d1= 0.779 0.679
d2 = -0.087 -0.187
N(d1) = 0.782 0.751
N(d2)= 0.465 0.426

24.051*2%= 0.481
22.401*1%= 0.224
18.239*1%= 0.1824

.481 +.224 +.182 =

.887 *10 million shares=

X e-rT N(d2)

+ (r + 1/2σ2)T] / √σ2T

(iii)
55.000
75.000
0.100
0.250
3.000

18.239
0.421
-0.445
0.663
0.328

0.887

8874234.299
 13 You are the senior assistant to the Chairman of the Board of Hi-Teck Inc. In order to attract the chief operating offic

(i) 2% of any price appreciation in the price of the stock up to $60 per share;
(ii) 3% of any price appreciation above $60 but less than $75 per share;
(iii) 4% of any price appreciation above $75 per share;

The price appreciation is to be computed with respect to the share price exactly 3 years from now, and there is no early paym
The annual (not continuously compounded) risk free rate is 10% and the stock volatility is 50% annualized. The current price o
Use the Black Scholes formula to value the supplement. Should you be concerned in your calculations that the new chief oper

Current Price (S) 55 55 55

Exercise Price(E) 55 60 75
Rf 0.1 0.1 0.1
Variance(Sigma) 0.25 0.25 0.25 0.25
Time (T) 3 3 3

D1 0.779423 0.678951 0.421287

D2 -0.0866 -0.18707 -0.44474
ND1 0.782135 0.751415 0.663227
ND2 0.465494 0.425801 0.328254
CALL 24.05086 22.40138 18.23923
0.481017 0.672041 0.729569 1.882628 10000000
18826281
 ract the chief operating officer of his choice from another firm, the Chairman offers the following incentive supplement to her base salary

w, and there is no early payment of the supplement. The aggregate value of the supplement is based on the price appreciation of 10 million
nualized. The current price of the stock is $55.
tions that the new chief operating officer might increase the expected rate of price appreciation by wise actions?

C = S N(d1) - E e-rT N(d2)

d1 = [ln(S/E) + (r + 1/2σ2)T] / √σ2T

d2 = d1 - √σ2T
pplement to her base salary package:

ice appreciation of 10 million shares.