Question

QUESTION 1: What are the terminal payoffs of a European long call and European short put?

QUESTION 2: What is an executive stock option? why companies offer it to the executives?

Answer 1

1. The terminal payoffs for a European long call is:

Since, call options gives the holder of the call option a right but not an obligation to buy a specified security at a a specific price in the future. The pay off will be high, when the stock price us higher than the price at which the stock is already trading.

The terminal pay off is : (St - K)

where St is the stock price at k is the strike price of the call option.

The pay off of put option is = (K - St), as the put options gives the holder a right but not an obligation to sell the option at a price which is higher than the current stock price.

The pay off will be higher, if the strike price is high than the price at which the stock is currently trading.

2.Employee stock options are options which give an employee the right to buy the shares of the company at a guaranteed stroke price for several years to come. They give these stock options to link the executives vets interest with the shareholders interest of the executives would now want to work harder towards raising the stock price of the company which wold benefit the shareholders.It is a form of compensation given to attract and retain employees as well.