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

question 15

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.
σ The risk-free rate is 6%.
Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
σ d1 = 0.175
σ d2 = σ0.025
σ N(d1) = 0.56946
σ 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 optionσ

• A) $2.81
• B) $3.12
• C) $3.47
• D) $3.82
• E) $4.20

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Definitions:

Astigmatism

A common vision condition caused by an irregularly shaped cornea or lens, leading to blurred or distorted vision.

Cornea

The transparent front part of the eye that covers the iris, pupil, and anterior chamber, contributing to the eye's ability to focus.

Recessive Trait

A genetic trait expressed only when two copies of the gene are present, one from each parent.

Alleles

Different versions of a gene that determine distinct traits and can be passed from parents to offspring.