College Level Finance Homework Help?

Posted on 2014-04-23 07:19:00 in Finance by TED

I am stuck on this problem on my finance homework and need help understanding how the employee stock options work. Please help!



2. You are an executive at WX Resorts and you have executive stock options as part of your compensation. You hold 1,000 options that expire six months from today at a strike price of 50 but that can be exercised early. WX is trading at $55 and just announced a $1 dividend per share that will be paid four months from today to stockholders who own the stock three months from today.



(a) Using today's price of 50, what is the total value of your options using the Black-Scholes model if you hold European Options (assume ? = .30, r = .01)? (Hint: the stock price will fall by the discounted value of the dividend).



(b) If your options are American Options, what is the value today using Black's Approximation for dividend payments (assume ? = .30, r = .01)?



(c) Should you exercise early to receive the dividend? Explain.

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