A company issues an option grant with an outperformance feature,against the S&P 500.Assume S&P 500 = 950,S = 22,k = 25,σ = 0.25,r = 0.06,and 5 years until expiration.The S&P 500 has a dividend yield of 2%,standard deviation of 18.0% and a 0.30 correlation coefficient with the stock.What is the value of the outperformance feature?
A) $0.99
B) $1.31
C) $1.59
D) $1.72

Question

Quizplus · Accepted Answer

The outperformance feature is valued using the Black-Scholes model adjusted for the correlation and dividend yield. The given parameters and calculations lead to a value of $1.59.

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