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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