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:

Therapeutic Lifestyle Change

Lifestyle modifications aimed at improving health outcomes, including stress reduction, healthy eating, and regular physical activity, reiterated with a new emphasis.

Drug Therapies

Treatment of disease or disorders with pharmaceutical drugs as opposed to surgery or other therapies.

Brain Stimulation

The application of electrical or magnetic stimulation to specific brain areas to treat neurological and psychiatric disorders or to study brain function.

Psychosurgery

A medical intervention that involves operating on the brain to treat psychological disorders or alleviate severe mental distress, now rarely performed.