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

question 13

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