Explanation:
For employee stock options, the value is typically lower than regular exchange-traded call options due to several factors:
In this case, the regular call option is valued at SGD 4.39 using Black-Scholes-Merton model. However, employee stock options should be valued at a discount to account for these restrictions and risks.
Among the given options:
Given that employee stock options typically trade at a discount due to their restrictions, SGD 3.97 is the most reasonable estimate as it reflects an appropriate discount for the limitations of employee stock options compared to freely traded call options.
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The CFO at a non-dividend-paying firm asks a financial analyst to evaluate a plan by the firm to grant stock options to its employees. The firm has 60 million shares outstanding. Under the proposal, the firm would issue 3 million employee stock options, with each option giving the holder the right to buy one share of the firm's stock at a strike price of USD 70. The employee stock options would expire in 4 years. A four-year call option on the stock with the same strike price is currently valued at SGD 4.39 using the Black-Scholes-Merton model. Which of the following is the best estimate of the price of one employee stock option assuming that the call option is correctly priced?
A
SGD 3.97
B
SGD 4.18
C
SGD 4.39
D
SGD 4.45
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