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:

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