Determine the value of the call option


Problem:

An analyst is interested in using the Black-Scholes model to value call options on the stock of Ledbetter Inc. The analyst has accumulated the following information:

· The price of the stock is $40.

· The strike price 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 12 percent.

Given this information, the analyst is then able to calculate some other necessary components of the Black-Scholes model:

· d1 = 0.25.

· d2 = 0.05.

· N(d1) = 0.5987.

· N(d2) = 0.5499.

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?

  • $3.38
  • $2.60
  • $3.76
  • $3.87
  • $4.12

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Finance Basics: Determine the value of the call option
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