An Analyst Wants to Use the Black-Scholes Model to Value

question 4

Multiple Choice

An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
?The price of the stock is $40.
?The strike price of the option 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%.
Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
?D₁ = 0.175
?D₂ = ?0.025
?N(d₁) = 0.56946
?N(d₂) = 0.49003
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) $2.81
• B) $3.12
• C) $3.47
• D) $3.82
• E) $4.20

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Definitions:

Inflation

A universal hike in costs and decline in the monetary value.

Long-Run Phillips Curve

An economic concept stating that in the long run, there is no trade-off between inflation and unemployment, depicted as a vertical line at the natural rate of unemployment.

Fiscal Policy

Fiscal policy involves government spending and taxation to influence the economy.

Inflation Rate

The percentage increase in the price level of goods and services over a period of time.