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1. If we ignore tax consideration and assume that Sally Jameson is free to sell her options at any time after she joins Telstar, which compensation package is worth more?

First scenario, if Sally chooses stock options and hold until maturity date. Ignoring the taxation and other constraints, the future value of cash compensation at the end of the 5th year will be 5000 * (1 + 0.0602) ^ 5 = 6697.44. We can easily form the equation 3000 * (P – 35) = 6697.44, where P is the future stock price of Telstar, so the stock price must increase to at least 37.23 at the end of 5th year to get the same amount of the cash compensation and if the stock price where to stay below 35, Sally’ option would be worth nothing. The stock, which pays no dividend and is not expected to pay one in the foreseeable future, is trading at 18.75. It seems significant difference between the exercise price and the spot price. As shown in Exhibit 2, Telstar stock price has increased higher than $35 only once and 10-year average stock price is around 20. Therefore, the chance that the value of option is greater than the cash compensation is very rare.

Second scenario, assume Sally is free to sell options at any time after her joining Telstar, she may sell her option immediately after receiving. Then we try to price the value of stock option by using Black - Scholes Model.

We know that the stock is currently trading at $18.75 and the exercise price is $35. We take the 5 year T-bill rate 6.02% as the risk free rate. From the Exhibit 2, we can calculate the volatility of Telstar stock return is around 27.65%. Plug them into the formula, the call option price will be 2.53. At this amount, Sally’s options would be presently worth 2.53 * 3000 = 7590. She is better off taking the option.

2. How should we factor in…...

...If we ignore tax considerations and assume that Sally Jameson is free to sell her stock options at any time after she joins Telstar she has several options. She can either choose to take the cash bonus, the stock options and sell it, or she can take the option and keep it until it is worth use. Let’s compare the three situations that we choose to analyse : 1- She takes the cash bonus and decide to invest it in a 5-year bond which has a anualize rate of 6.02%. So at the end she will win 5310$ (=5000*1.0602). 2- She takes the options in order to sell her stock options. Let’s assume that it is easy to find someone who want to buy the option at the value of the call option. Using the exhibit 3, the standard deviation of the Telstar common stock is 30%. S= 18.75 K= 35 r= 6.02% t= 5 σ= 30% So C= 2.9245 Assuming that she can easily and quickly find someone to buy her options, she can sell it at 3000*2.9245= 8773.5$ Then she could even invest these 8773,5$ in a 5years bond and win 8773,5*1,0602=9301,7$ 3- She keeps the options until it is worth use it and sell her shares. If she wants to earn more than she could have won by taking the cash bonus we have to find the value of the stock that would make her win more than 5301$ (X-35)*3000=5301 => X= 36,767 So when the value of the stocks is greater than 36,767, it will be worth using the option and sell the shares after. Sally Jameson will win more than 5301. If she want to earn...

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...considerations and assume that Sally Jameson is free to sell her options at any time after she joins Telstar she has several chooses. She can either choose to take the cash bonus, either take the options and sell it, or she can take the option and keep it until it is worth use. Let’s compare the situations : 1- She takes the cash bonus and decide to invest it in a 5-year bond which rate is 6,02%. So at the end she will win 5310$ (=5000*1,0602). 2- She takes the options in order to sell it. Let’s assume that it is easy to find someone who want to buy the option at the value of the call option. Seeing the exhibit 3, the standard deviation of the Telstar common stock is 30%. S= 18,75 K= 35 r= 6,02% t= 5 σ= 30% So C= 2,9245 Assuming that she can easily and quickly find someone to buy her options, she can sell it at 3000*2,9245= 8773,5$ Then she could even invest these 8773,5$ in a 5years bond and win 8773,5*1,0602=9301,7$ 3- She keeps the options until it is worth use it and sell her shares. If she wants to earn more than she could have won by taking the cash bonus we have to find the value of the stock that would make her win more than 5301$ (X-35)*3000=5301 => X= 36,767 So when the value of the stocks is greater than 36,767, it will be worth using the option and sell the shares after. Sally Jameson will win more than 5301. If she want to earn more than she could have won by selling the options, she will have to wait for the...

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...Arundel Partners – The Sequels Project After evaluation of the proposed acquisition of the movie sequel rights, we recommend to offer movie studios as a per-movie price to purchase the sequel rights for their entire portfolio of movies the studios are going to produce over the next year. Arundel should make an offer to buy sequel rights as the average NPV (on a per film basis ) is $5.51 mn (this is the value calculated using real options method). Hence, we should pay a price below $5.51mn. As per informal inquiries made by us, the studios would be tempted to accept the price of $2mn or more and would not even consider a price below $1mn. We propose that we should negotiate for the price of $2mn. This would give us a profit of $3.51 mn per film. The movie studio might (or might not) be willing to sell these rights at this price because it helps the studios mitigate the risk associated with producing the sequel. Also, the fact that there is no liquid market for rights to produce sequels will also drive the price lower on account of lack of demand. Average value of Sequel rights per film using DCF Analysis Average value of sequel rights per film across all studios 1. There are 99 films in the portfolio. Arundel Partners will only produce films for which hypothetical NPV is greater than zero. Hence, we calculate NPV of each film at Year 0. Since the exhibits state that the values are already preset values, we have not rediscounted them. NPV (At year 0)...

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...Real options analysis, Spring 2014 Deadline: March 17, 3:30pm, submit your solution via e‐mail to sspinler@whu.edu Filename convention:

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...Suggested Format for Case Analyses: 1. Executive Summary: brief 1 paragraph stating key problem(s) and your main recommendation(s)/decision(s). 2. Problem Identification: 1-2 page write-up of the key problem(s) you have identified within the case. This should not be a re-hash of the case itself. The Case Study questions should help you address the issues in this section. 3. Action Plan: 1-2 page write-up of your proposed solution to the problem(s) with detailed steps as to how to proceed with implementing your proposal. 4. Financial Analysis: 1-2 page write-up of the financial analysis that supports the recommendation(s) you have presented in the Executive Summary and Action Plan. Use an electronic spreadsheet to do the calculations and print out these figures as an attachment to your case analysis. Case Study Questions: Tiffany & Co.—1993: Should Tiffany actively manage its yen-dollar exchange rate risk? Why or why not? If Tiffany were to manage its exchange rate risk activity, then what should be the objectives of such a program (e.g., what specific purpose or theoretical rationale can justify a decision to hedge the yen-dollar risk)? Assuming Tiffany wanted to hedge this risk, try to identify what exposures should be managed via such a hedging program (e.g., hedge sales, net income, cash flow, etc.). Also, try to quantify how much of these exposures should be covered and for how long. Identify, in terms of cost, benefits, and risk, the......

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...futures price. In order to make a profit, one has to "buy low, sell high". As Ft(t,T) = $312.30 < Fa(t,T) = $313.55 Jim should short March'86 MMI futures contracts. Thereby, he can buy them at the theoretical price of $312.30 and sell them at $313.55. To short the futures, Jim has to buy the underlying. Therefore, he has to invest some money. Part of it will be the company’s own funds; the major part comes from borrowed funds. Jim can have a total position of $5,000,000. Jim has the restriction that 10% of this amount must be kept as margin. Therefore, he would borrow $4,999,516.42 from the bank at a borrowing rate of 8%. The cost of capital for company funds is expected to be higher. However, as this number is not explicitly given in the case, we assume that it is 8% too. The total price for the index is adjusted by a mark-up of 0.0025% for a round-trip impact. As he cannot buy partial stocks, he will only make use of $4,999,516.42 (see Figure 1). Jim will use this amount to buy 3628 shares of the index (more precise, shares of each component stock) on February 26th. Moreover, he shorts 64 contracts of March '86 futures. The number of contracts is rounded 64 as 4999516.42/(313.55*250). The cost for that at t is zero. To calculate the return at T, several calculations have to be performed. The following formula is applied to calculate the future value of the loan taken, in other words, what Jim has to buy back at T: 〖FV〗_l (T)=〖PV〗_l (t)e^r(T-t) with 〖PV〗_l (t) =......

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...has grown significantly in recent years by acquiring less wellrun properties and applying its “rationalize and reconfigure” strategy. The MW Petroleum properties appear to offer the opportunity to continue this strategy. If Amoco can strike a price wherein Apache shares some of its operating savings with Amoco, both parties can generate positive net present values from the transaction. Acquisition of MW Petroleum may also reduce the volatility of Apache’s cash flows by making them less dependent on gas. Although this may not benefit shareholders directly, it will likely enable management to sleep better and might increase Apache’s borrowing capacity, thereby benefiting shareholders indirectly. 2. (10 points.) Whose projections appear in the case exhibits? From Apache’s perspective, is there any reason to believe these numbers might be biased one way or another? Does the value of MW Petroleum derived from these numbers represent Apache’s maximum acquisition price? Explain. The story appears to be a mixed one. Although Apache is capable of making its own cash flow projections, the projections presented are not Apache’s. In particular, the oil and gas price....

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...Ch 9 Profit profile Pay off profile Definitions know concepts Margin question- how your margin account behaves given certain prices (options) Ch. 10 Variables of option pricing slide 3 –input paramaters affecting stokc options Boundary counditions (eg. Lower bound for European calls) Put call parity –replicate by moving everything else in the other side sell most expensive buy least expensive Slide 5 Bull spread/bear spread using calls and puts, e.g. max profit in bull/bear spread Box spread- payoff difference between strike prices = price today pv of difference of strike price Calendar spread(not specific question) Strip-strap whats strategy in place, profit expectation Ch. 12 Use contrstuct binomial trees Derivative with payoff = st2 – 750 <-pays this amount in maturity T=0.5 years Rf= 5% continuously compounded So=30 Volatility=20% delta(t)=.25 /36.64 30 -<33.16 27.15 \24.56 U=e^sigmasqrt(deltaT)=e.2sqrt(.25)=1.10517 d=e^-sigmasqrt(deltaT)=1/u=0.90484 Upper bound 30*1.10517=33.16 33.16*1.10517=36.64 Lower bound 30*.90484=27.15 27.15*.90484=24.56 p=(e^rdelta*t)-d/u-d=.5378 1-p=.4622 Payoff St^2-750= 36.64^2-750=592.5 30^2-750= 150 24.56^2-750=-146.81 Calculate value of derivative thru nodes B: ([.5378)(592.5)+.4622(150)) e^-.05(.25) C=.5378(150)+.4622(-146.81)e^-.05(.25) A=(.5378(B) + .4622(B) )e^-.05(.25) Payoff 33 = put 36.64 strike price......

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...Date: MAY 1992 Subject: Valuing stock options in a compensation Package Purpose: To determine which option worth for Mrs Jameson, and how long should she stay at Telster. Q1,2: The stock currently trading at $18.75. (20.25-18.75)x3000=4500. If she choose cash compensation package and if there is no TAX, She will receive $5000+(5000x3.8%). Obviously it is worth than stock option. Q3: The options do not vest until the fifth year and the strike price is $35. What is the price of the 5-year option? If Jameson chose stock options, she would hold European 3000 call options (early exercise is impossible) on stocks without dividends which give her the right to buy Telstar stocks at the strike price $35 per share in the 5th year from the date she joins Telstar. The option price is $2.65. Total value of 3000 call options that Jameson would receive is 3000 x $2.65 = $7943 (taxes and transaction costs are ignored), which is option premiums that Jameson can receive if she sells her 3000 granted options. Q4: If Jameson chose cash compensation package and if there is no tax, she will receive $5000 today. If she used this money to invest in 5-year T-bills, the future value of her compensation would be worth: $5000 x 1.0602 = $5301 in 5 years. $7943 is worth than $5301. If she accepts deal (stock option and job), she should untie her wealth from the fortunes of Telstar by using bull spread strategy, which is to sell identical call options with higher strike price, for......

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...SECOND CITY OPTIONS: A Case Study on Index Options[1] Don M. Chance and Michael L. Hemler (Version: August 30, 2011) Second City Options (SCO) is a small firm that specializes in option trading. Employing 35 people, SCO is located on LaSalle Street in the Chicago financial district. It is a member firm of the Chicago Board Options Exchange (CBOE), where it trades options on stocks and stock indices. It is also a member firm of the Chicago Mercantile Exchange Group (CME Group), where it trades options on futures and the underlying futures contracts. SCO trades for itself and a number of corporate and individual clients. In addition, it provides general advice to other clients who trade for themselves. SCO was founded in 1975, two years after the CBOE opened. It was very successful for its first 25 years, but its profits have declined steadily since 2000. SCO's founder and principal owner, Joseph Jensen, is 67 years old and has been a life-long student of the stock market. Jensen has traded since he was a teenager. By the age of 30 he was a millionaire and an acknowledged expert on analyzing market trends. Throughout his career Jensen has relied primarily on technical analysis, the evaluation of trends in past market data such as prices and volumes. He has consistently devised option strategies to take advantage of his stock market forecasts. Over the last several years, however, his techniques have grown less profitable. Jensen attributes his declining......

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...AUGUST 19, 2003 PETER TUFANO Sally Jameson: Valuing Stock Options in a Compensation Package Sally Jameson, a second-year MBA student at Harvard Business School, was thrilled but confused. It was late May 1992, graduation was approaching, and she had finally landed the job of her choice. She had just finished an early morning telephone conversation with Bob Marks, the MBA recruiting coordinator at Telstar Communications, a large, publicly held multinational company. Mr. Marks had offered Ms. Jameson a unique position in operations at Telstar, and from the description, it sounded exactly like the job that she wanted. Since her first interview with Telstar, she had been very impressed with the company and its people. While Ms. Jameson was certain that she would accept the job, there was still one unsettled, yet crucial, matter--her compensation. During the conversation with Marks, Jameson had asked what her compensation package would be. Marks: "Well, Sally, we are all very impressed with you and would like to offer you a starting salary of $50,000. In addition, you will also receive a signing bonus." Jameson: "The base salary is a little below what I had expected. Is that negotiable?" Marks: "I'm afraid not. That's the same starting package all MBAs get. However, you will receive a bonus upon accepting our offer. You can receive $5,000 in cash, or choose stock options instead." Jameson: "I'm not too familiar with stock options. Could you explain to......

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...interviews, and it’s also the season, hopefully, for lower unemployment rate. Sally Jameson, an MBA student graduated from the ivory tower HBS, is one of the lucky graduates and got a job from Telstar. Additionally, the generous employer offers her a special compensation package – she could choose either cash of $5,000 or 3,000 special options that allow her to buy as many as 3000 shares of Telstar’s stocks for $35.00 at her 5th anniversary employment. Today is May 27, 1992, we have a list of quotations of Short- and Long-term Call Options of Telstar stocks, a list of historical price and volatility of Telstar Common Stock since Jan, 82, and a list of T-bill security yields. Now we are here to help her make a choice. I. B-S Model for option pricing Today is the final day for Sally to make a choice, we relies on the famous Black-Scholes Model to price the options in the compensation. Before pricing, we need to know the volatility and the continuous compounded interest rate. For interest rate, we regard the 5 years T-bill bond yields as the “risk-free” rate and assume Sally and other investors of Telstar are risk-neutral. 1+5*BEY5yr=exp5r, where BEY5yr is the annualized Treasury Bill’s bond equivalent yield and r is the continuous compounded interest rate we want to derive, which is 5.2627%. Secondly, since historical volatility could not perfectly reflect the scenarios in the future, we use options prices that could reflect the investors’ expected volatility (due......

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...Sally Jameson: Valuing Stock Options in a Compensation Package (Abridged) Group Satie: Ai Nakajima, Chen-Wei Tang, Mithun Sridharan, Sarah Wright, Daniel de la Cuesta 23th May 2012 If we ignore tax considerations and assume that Sally Jameson is free to sell her options at any time after she joins Telstar, which compensation package is worth more? We can calculate the value of the stock options today using the Black-Scholes Model. If the value of the 3000 Sally´s stock options is greater than $5000 and she has the possibility to sell the options, then she should go for the stock options instead of the cash. To calculate the value of the stock options today we have to find the volatility of the stock. In this case we are going to calculate the “historical implied volatility”, which refers to the implied volatility observed from historical prices of the stock. We have the historical price of the stock for the last 10 years so we calculate the gains for each value compared with the previous one (P1/PO) and we convert them to the logarithmic scale (LN(P1/P0)). After that, we calculate the standard deviation of the time serie and we multiply it by SQRT(252) to get the annualized volatility. The final value for the volatility is 0.3689. Now we have all the data to calculate the current fair value of the stock options offered to Sally: Option Price P 23 Exercise price X 35 Current Stock Price S 18.75 Risk-Free Rate r 4.07% Maturity of the......

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...Sally Case One significant flaw in how overhead costs is allocated by Sally under in the ABC systems is, her application of the 150% for both the internal control and information systems departments. The flaw here is that Sally is kind of using both the ABC and the standard cost system at the same time in determining the charge out rate for the two departments. This will inflate the charge out rate for the internal control consulting, with the information system consulting been reduced, considering the activities performed in the information systems consulting which includes software development, installation, conversion assistance, and training. Yes The key here is that we would be basing the cost driver rate by actual capacity, not practical capacity so cost issues could still be hidden and there is not incentive to be more efficient. For example, it may turn out they have similar subscriptions or four people have the same subscription and they don’t know. 1/4 D Since Sally’s company is a service company, activity based costing is ideally suited for her organization. This is because virtually all the cost of her firm is indirect and appears to be fixed. The large component of apparently fixed costs in her firm arises because, unlike manufacturing companies, service companies have virtually no material costs—the prime source of short-term variable costs. Three ways in which ABC leads to accurate product cost for Sally are outlined below. Firstly, ABC provides more......

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...Informe de Estrategia Chile Estrategia de mercado Ruidos en el corto plazo, pero fundamentos intactos IPSA objetivo 5.200 IPSA Actual: 4.329 Luego de un buen desempeño en el año 2010, el mercado local ha registrado una importante corrección en lo que va del año 2011, debido tanto a factores internos como externos. Un principio de año con bajos volúmenes transados como es habitual en esta época, importantes colocaciones realizadas y por venir, sumado a la salida de flujos hacia mercados como el de EE.UU. primero y la incertidumbre proveniente del norte de África y el Medio Oriente después, han mantenido presionada a la bolsa local. Un escenario más incierto debido a la inestabilidad de los países productores de petróleo, situación de Japón y un sesgo al alza en términos de inflación nos lleva a revisar nuestra estimación para el IPSA y fijarla en 5.200 puntos para diciembre de 2011. Estamos ajustando nuestra estimación para el IPSA dado que incorporamos un mayor riesgo al alza de la inflación, lo que potencialmente implica una tasa de política monetaria más restrictiva. Para determinar nuestro target estamos considerando dos metodologías, una utilizando el promedio ponderado de nuestros precios objetivos (Bottom-Up) y la otra con la relación histórica existente entre renta fija y renta variable en el mercado local (Top-Down). Mantenemos nuestra visión de mediano plazo dado que las atractivas valorizaciones abren espacio para retomar la expansión del IPSA. Consideramos que......

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