What is the minimum value

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Suppose the CEO of your company owns 500,000 shares of stock in the company and is granted 10,000 non-transferable European options as a bonus. The expiration date of the options is two years, the strike price is $100 and the stock is now selling for $95 per share. Assume that the two year continuously compounded interest rate is 7%. Assume further that the company pays no dividends. You are called in to advise the CEO about how to value the options. She wants to know the following:

(a) What is the minimum value she should accept for these options if they were transferable?

(b) Assuming she is ready to buy or sell some assets other than the non-transferable options, how can she realize that minimum value with certainty?

(c) Why should you advise her not to sell the options for their minimum value, even if she could, and instead to follow the strategy outlined in (b)?

Reference no: EM131318614

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