A Company Issues an Option Grant with an Outperformance Feature,against

question 8

Multiple Choice

A company issues an option grant with an outperformance feature,against the S&P 500.Assume S&P 500 = 1100,S = 46,k = 45,σ = 0.30,r = 0.04,and 10 years until expiration.The S&P 500 has a dividend yield of 2.5%,standard deviation of 20.0% and a 0.45 correlation coefficient with the stock.What is the value of the outperformance feature?

• A) $2.25
• B) $3.29
• C) $4.11
• D) $4.78

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Definitions:

Milgram Experiment

A psychological experiment conducted by Stanley Milgram in the 1960s to study obedience to authority, where participants were instructed to administer electric shocks to another person.

Stanford University Prison Experiment

A psychological study conducted by Philip Zimbardo in 1971 at Stanford University, where students were assigned roles of prisoners and guards to explore the effects of perceived power.

Generalization

Drawing a conclusion about a certain characteristic of a population based on a sample from it.

Logical Support

The provision of reasons or evidence to justify a claim or argument.