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

question 1

Multiple Choice

An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. 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:
-d₁ = 0.175
-d₂ = -0.025
-N(d₁) = 0.56946
-N(d₂) = 0.49003
N(d₁) and N(d₂) represent areas under a standard normal distribution function. What is the value of the call option?

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

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