You Calculate the Black-Scholes Value of a Call Option as $3.50

question 55

Multiple Choice

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is ________ or the volatility you input into the model is too ________.

• A) overvalued and should be written; low
• B) undervalued and should be written; low
• C) overvalued and should be purchased; high
• D) undervalued and should be purchased; high

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Definitions:

Promoter

A person who participates in the initial setting up of a corporation or who assists the corporation in making a public share offering.

Corporation

A legal entity that is separate and distinct from its owners, who are shareholders; corporations can own assets, incur liabilities, and conduct business.

Public Share

Equity in a company that is available for trading by the general public on a stock exchange.

Securities Commission

A provincial agency that serves as a watchdog for the stock market.