Apply the Black-Scholes Formula to the Pricing of a 6-Month

question 22

Multiple Choice

Apply the Black-Scholes formula to the pricing of a 6-month call option with an exercise price of $85 on a stock with a current price of $85.The standard deviation of the annual stock return is 32%.The 6-month interest rate is 2.5%.

• A)$8.64
• B)$8.98
• C)$7.18
• D)$6.45

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Definitions:

Prices

The amount of money required to purchase a good, service, or asset, often influenced by supply and demand.

Short-run

A period in which at least one factor of production is fixed, limiting the ability of a business to fully adjust to market changes.

Short-run Aggregate Supply

The total supply of goods and services that firms in an economy plan on selling during a specific time period at current prices.

Short-run Phillips Curve

It illustrates the inverse relationship between the rate of inflation and the unemployment rate in the short term.