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

question 1

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:

Interest

Interest is the charge for borrowing money, typically expressed as an annual percentage rate.

Effective Rate

The actual interest rate on an investment or loan, considering the compounding of interest at specific intervals within a given time period.

Interest Rate

The proportion of a loan charged as interest to the borrower, typically expressed as an annual percentage.

Effective Yield

The total yield on an investment after considering the effects of compounding interest or dividends over a specific period.