 The compensation package of an executive at a firm may include base salary, annual bonuses, retirement contributions and even options. Now sometimes the value of these options constitutes a substantial part of the overall compensation package. Now let's see why these options are given to the executives in the firm. We see that an option is an alternative tool to increase the base pay of the firm's executives. These options align executives interest with those of the firms and they allow the executives to work for the benefits of the firm's shareholders. These options allow the firm to lower the executive's base pay and in this way there are the chances to reduce the disparity between the salary of the executives and the other employees of the firm. Also these options put an executive's salary at a risk rather than guaranteeing it and therefore this happens irrespective of the firm's performance. Also these options are tax efficient. This means that these are taxed only when an executive exercises his option. How to value an option given to an executive in the firm? In fact the main purpose of options is to align the managerial interest with those of the interest of the firm's shareholders and also there is the purpose to tie these CEOs or the executives' fortunes rise and fall those of the firms. The economic value of options depends on certain factors like risk free rate of return, expected dividend rate, expected volatility in the underlying assets return and the options expiry date and the expected term of the option and the exercise price of the option. Now to value these options we need to use the famous BS or the black skull model with little modifications. Let's see an example to understand how options can be valued. We have here an executive which is CEO of the firm. There are stocks granted to the executives in year 2015. The grant of the stock option is to the tune of 1.662 million shares with the exercise price of 50.99 million dollars per share. Now we assume that the stock price equal to the exercise price which is 50.99 dollars per share. Risk free rate of interest is 5% and the year to expiry is 5 years. The variance or the standard deviation of the return on assets of the firm is equal to 0.1403 per year. Now we assume that all the options were granted at money. So we can calculate the value of this call as an option to the executive of the firm using the famous black skull model which works in three steps. At step 1 we need to calculate the value of D1 and D2. We have the model of D1 and D2 putting value in these two models we can get the value of 0.7173 for D1 and for D2 the value is 0.1204. And in the second step we need to determine the value of N D1 and N D2 which are basically the probability that the normal distribution of random variable will be less than or equal to the value of D. And for that purpose we can use the normality distribution function given in the excel. Using that function the value of N D1 is equal to 0.7634 whereas for N D2 the value is 0.4321. In step 3 now we have computed the required values and using these values into the model of the BS. We can determine the value of this option which is 20.97 dollars per share as we know that there are 1.662 million shares of the stock given to the executive as the option. So the total value of this option comes to 34.9 million dollars. Now let's see another example where the shares held by a company's CEO are 1 million and the exercise price of these shares is 30 dollars per share whereas the current share price is 50 dollars per share. So if the firms CEO exercises his option right now his current net net worth of these options will be equal to 20 million dollars. The there is some additional information relating to this CEO and that information says that the CEO holds a 5 million dollars in the stock of this company's and he is also holding 5 million dollars in other assets. So we see that the portfolio of this CEO is equal to 30 million dollars and out of 30 million dollars 25 million dollars he has invested in a single company. So his personal portfolio is not so much diversified because he has put 83 percent of his wealth in a single company's stock and that carries an unnecessary risk for the CEO. The implication of this risky portfolio is that any drop in the current stock price from 50 dollars to 30 dollars will lower the options current value equal to zero. Although the options with more time maturity might not lose all the value of itself because the purpose of guaranteeing options to the firm's CEO is to make the CEO's fortune rise and fall with that of the firm's fortune. So if we can conclude here we can conclude that the executives are required to hold options for at least a freeze out period rather than selling out them to realize their value. And the implications of this is that if the options are a large portion of an executives net worth then the total value of these options to the executives is less than the market value of these options.