Congratulations! You have been hired as an agent representing Johnny Baseball. Johnny doesn’t care about risk, but he discounts the future at a rate of 10% per year. Johnny has an offer of $20 million a year for the four years 0 through 3 from the Red Sox. The Guardians are going to make Johnny an offer where he plays in the minor league for year zero at $1 million and then plays for 3 years at a constant salary. How large does that salary need to be for Johnny to take it over the Red Sox offer?
Congratulations! You have been hired as an agent representing Johnny Baseball. Johnny doesn’t care about risk, but he discounts the future at a rate of 10% per year. Johnny has an offer of $20 million a year for the four years 0 through 3 from the Red Sox. The Guardians are going to make Johnny an offer where he plays in the minor league for year zero at $1 million and then plays for 3 years at a constant salary. How large does that salary need to be for Johnny to take it over the Red Sox offer?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Sports Agent/Option Value
Congratulations! You have been hired as an agent representing Johnny Baseball. Johnny doesn’t care about risk, but he discounts the future at a rate of 10% per year.
Johnny has an offer of $20 million a year for the four years 0 through 3 from the Red Sox.
- The Guardians are going to make Johnny an offer where he plays in the minor league for year zero at $1 million and then plays for 3 years at a constant salary. How large does that salary need to be for Johnny to take it over the Red Sox offer?
Johnny’s prospects are uncertain. If Johnny were to strike a new 2-year contract after two years of play on the open market, there is a 50% it would be for $20m a year, a 25% change it would be for $30 million a year, and a 25% change it would be for $10m. These are the values to the Guardians and the values he could get on the open market.
- The Guardians want to offer Johnny a contract that pays a fixed amount per year for years 0 and 1, and then gives the team the option (but not obligation) to sign him for $20m a year for year 2 and 3. How large does that fixed amount in year 0 and 1 need to be for Johnny to take it over the Red Sox offer?
- The Guardians want to offer Johnny a contract that pays a fixed amount per year for years 0 and 1, and then gives Johnny the option (but not obligation) to sign up for $20m a year in year 2 and 3. How small can the fixed amount in year 0 and 1 be for Johnny to take it over the Red Sox offer?
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