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

question 26

Multiple Choice

An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. 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. What is the value of the call option?

• A) $2.81
• B) $3.12
• C) $3.47
• D) $3.82

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Definitions:

Optimal Decisions

Choices made that are the most advantageous or beneficial given the current situation or data.

Multiple Options

Refers to situations or questions that offer more than one possible answer or choice.

Outcomes Of Decisions

The consequences or results that follow from the choices individuals make.

Utility Theory

An economic theory that describes how individuals make choices based on their perceived satisfaction or utility from outcomes, aiming to maximize pleasure and minimize pain.