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In: Finance

Assume that you, as an STI employee, were awarded options on 1,000 shares of STI stock...

Assume that you, as an STI employee, were awarded options on 1,000 shares of STI stock today at the current market price. Without doing a detailed numerical calculation, make your best-guess estimate as to the economic value of this option grant. What factors did you consider in making your estimate? Would this option grant likely affect any of your behaviors? If so, how?

Solutions

Expert Solution

  1. Volatility - It measure how much the stock prices varies from day to day. It undergo larger and more frequent price changes than non-volatile stocks. A small change in the volatility estimate can have a significant impact on the price of an option.
  2. Looking at the broad market trends that will push up the profits of a particular company. Figure out the company that is best positioned to capitalize a broad trend.
  3. Analysing the company by leadership, Are the leaders good? Are they trustworthy? How long have they been with the company? Whether it is a small company or big; always want to invest in the leaders.
  4. Based on the past price trends
  5. Social analysis - If the STI stocks are popular accordingly, estimate the price range.

Yes, it'll affect the behaviour. where one need to watching the market regularly. If we classify investing based on average time invested in a particular stock, then we would have four broad categories:

  1. Day traders – average time invested in a stock ranges from few minutes to maximum 1 day.
  2. Short term – average time of 1 day to 1 year
  3. Medium term – average time of 1 year to 9 years
  4. Long term – average time of more than 10 years

Prsopect theory - This theory, contributed by Daniel Kahneman which won him Noble prize for economics in 2002. As per the theory, the possibility of loss has twice the psychological impact than a gain. More psychological impact means more stress. The amount of stress is very low if we incur a loss of Rs 100,000/- in a single shot as compared to the stress we go through if we incurr a loss of Rs 1000/- each day for 100 days.


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