The remuneration package for the CEO of a quoted company in the tax year 2012/13 includes a bonus proportional to the excess of the share price over 100p at 5 April 2013 at a rate of £50,000 per penny. The company’s Finance Director wants to hedge the cost of this bonus as at 6 April 2012. The share price at that date is S0 = 90p. The continuously compounded interest rate is 1% p.a. and the share price volatility is 18% p.a. (i) Explain the bonus in terms of an option on the share price. Please can someone help me follow the logic of why there are 5million call options that have been created. Why is there an exercise price of 100p? Also how does this create the same pay off as 50k * max(S1-100,0)?
