Sally and Jameson Case Study Question 1

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Question 1

If we ignore tax 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 value of the stock to be :

(X-35)*3000=8773,5$ => X= 37,9245

If the value of the stock is greater than 37,9245 she will win more than if she sold the options.

Assumptions :

In 10years the Telstar Common Stock only reach 35$, so the chance the value of the stock goes up until 35$ is really low. And even more if we want to stock to be more than…...

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