An Analyst Is Interested in Using the Black-Scholes Model to Value

question 10

Multiple Choice

An analyst is interested in using the Black-Scholes model to value call options on the stock of Ledbetter Inc. The analyst has accumulated the following information: • The price of the stock is $40.
• The strike price is $40.
• The option matures in 3 months (t = 0.25) • The standard deviation of the stock's returns is 0.40 and the variance is 0.16.
• The risk-free rate is 6 percent.
Given this information, the analyst is then able to calculate some other necessary components of the Black-Scholes model:
• d1 = 0.175
• d2 = -0.025
• N(d1) • N(d2) N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option?

• A) $0.60
• B) $3.17
• C) $3.47
• D) $4.20
• E) $8.00

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Definitions:

Profit-Maximizing Entrepreneur

An individual or business that adjusts the combination of production inputs and outputs to achieve the highest possible profit.

Investment Project

A planned undertaking aimed at achieving specific financial returns through the allocation of resources to productive activities.

Interest Rate

The proportion of a total amount of money that is levied for borrowing it, usually described as a yearly rate percentage.

Interest Rate

The percentage of the principal charged by the lender for the use of its money, or earned by an investor on an investment.