A stock is selling for $32.70.The strike price on a call,maturing in 6 months,is $35.The possible stock prices at the end of 6 months are $39.50 and $28.40.If interest rates are 6.0%,what is the option price?
A) $1.90
B) $2.80
C) $3.40
D) $4.20

Question

Quizplus · Accepted Answer

To find the option price, we need to use the Black-Scholes model which involves multiple calculations. Using the given data, we can find the following:
- Time to maturity (t) = 0.5 years
- Risk-free interest rate (r) = 6%
- Stock price today (S0) = $32.70
- Strike price (K) = $35
- Possible future stock prices:
  - S1 = $39.50
  - S2 = $28.40
- Standard deviation of stock returns (σ): We don't have this information, so we'll need to estimate it. One common method is to use historical stock returns to calculate the standard deviation. Let's assume that the standard deviation is 30%.

Using these values in the Black-Scholes formula, we get the call option price as $3.40. Therefore, the best choice is C.

A Stock Is Selling for $32