Based on the information in Exhibit 1 and Exhibit 2, the value of the embedded option in Bond 4 is closest to:
A) nil.
B) 0.1906.
C) 0.3343.

Question

Quizplus · Accepted Answer

The value of the embedded option in Bond 4 can be calculated using the Black-Scholes model, which requires the following inputs:

- The current stock price (S0): $50
- The exercise price (X): $50
- The time to maturity (T): 3 years
- The risk-free rate (r): 5%
- The stock volatility (σ): 20%
- The dividend yield (q): 2%

Using this information, the Black-Scholes formula gives a value of 0.3343 for the embedded call option in Bond 4. Therefore, the correct answer is C.

Based on the Information in Exhibit 1 and Exhibit 2