Black-Scholes valuation model-call option
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A) Consider an option on a non-dividend-paying stock when the stock price is $40, the exercise price is $40, the risk-free interest rate is 9%, the volatility is 30% per annum, and the time to maturity is 12 months. Using the Black-Scholes valuation model, what is the price of a European-style call option under these conditions?
b) Assume that the stock in the previous problem pays a dividend twice in the life of the option. Assume that a dividend payment of $1 is made in six months, with another $1 paid just prior to the twelve month expiration. Using the Black-Scholes valuation model, what is the price of a European-style call option under these conditions?
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Solution Summary
The value of call option on stocks is calculated using Black-Scholes valuation model. Two questions are answered: one where stock does not pay any dividends and the other where the stock pays dividends.
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