A stock option is option to buy the shares of company

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Reference no: EM13874622

A Stock Option is an option to buy the shares of a company before certain time (maturity T) at a certain price (strike price K). Let St denote the company’s share price at time t.

a. Suppose at maturity, time T, the option has not been exercised. Draw a graph of the value of the option as a function of ST.

b. Use answer to a) to argue why granting employees stock options might be a good way to incentivize the employees to put more effort in improving the company.

c. The stock options granted to employees often have strike price equal to the share price at the issuance time of the options. However, if strike price is chosen far lower than the current share price, why would this be a “direct transfer of wealth from stockholders to insiders?”

d. How is that related to “stock dilution,” that is, the result of new shares of stock being issued by the company, thereby diminishing the percent ownership represented by previously existing shares, or equivalently share price?

Reference no: EM13874622

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