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

question 4

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:

N(d?) and N(d?) 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

---

Definitions:

Exposed

Left unprotected or vulnerable to harm, danger, or negative influences.

Sports

Competitive physical activities or games which, through casual or organized participation, aim to use, maintain, or improve physical ability and skills while providing enjoyment to participants.

Gene-environment Correlation

The relationship between individuals’ genetic makeup and their environmental exposure that can influence their traits or behaviors.

Artistic Endeavors

Creative activities or projects that involve the arts, such as painting, music, dance, or writing.