# Financial Options and Applications

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. 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

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#### Solution Preview

Black-Scholes model:

C = S*N(d1) - K*exp(-rt)*N(d2)

where

S =Stock ...

#### Solution Summary

An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data: