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:

National Average

A statistical value that represents the average of a particular measurement across a nation.

University of Pennsylvania

A prestigious private research university located in Philadelphia, known for its strong programs in several fields.

Normal Population

A group of individuals or elements that have a distribution following a normal curve.

Significance Level

The threshold at which the results of a statistical test are considered to be statistically significant.