Sally Jameson

Assignment: Advanced Compensation and Benefits

Sally Jameson Case

The main objective of the case is to find out the value of the 3000 stock options offered to Sally Jameson and compare them to the fixed cash offer of $5000. For this we can use the option price calculator provided at http://www.option-price.com/ The parameters required by the option price calculator are as follows: 1. 2. 3. 4. Underlying price: This is $18.75 (the current price of the stock) Exercise price: This is $35 (also known as the strike price of the option) Days until expiration: This is given as 5 years (calculate the number of days) Interest rate: This refers to the risk free interest rate which can be found Exhibit 4 for five years t bills 5. Dividend yield: This is given as zero 6. Volatility: This is not known and has to be estimated 7. Rounding: This simply determines the rounding off of the answer So the main challenge in this problem is to identify the "volatility" of the Telstar stock. There are two ways to do this... 1. In Exhibit 3 the volatility of the Telstar stock has been given over the past few years. This gives you an estimate that the volatility can range between a minimum of 20% to a maximum of 80%. But most of the time, the volatility fluctuates between 20% and 40%. 2. Another way to get the volatility is to calculate the "implied volatility" of stock by the price of the publicly traded telstar stock options. For this click on the tab saying "implied volatility" on the website. Here all the variables are the same as in the option calculator except for the fact that instead of volatility, you have "market price" (which is the price at which the option is traded. For this you can use the second part of Exhibit 1 where the price of three long term market traded options (similar to the employee stock option) are given. The days to expiry here will be from May 27th 1992 to Jan 22 1994. Thus by plugging in these values you will get three estimates of implied volatility....