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    Financial Options and Applications

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    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

    © BrainMass Inc. brainmass.com October 9, 2019, 8:05 pm ad1c9bdddf
    https://brainmass.com/business/black-scholes-model/financial-options-and-applications-139383

    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:

    $2.19