When the non-dividend paying stock price is $20,the strike price is $20,the risk-free rate is 6%,the volatility is 20% and the time to maturity is 3 months which of the following is the price of a European call option on the stock
A) 20N(0.1)-19.7N(0.2)
B) 20N(0.2)-19.7N(0.1)
C) 19.7N(0.2)-20N(0.1)
D) 19.7N(0.1)-20N(0.2)

Question

Quizplus · Accepted Answer

The correct answer is derived using the Black-Scholes formula for pricing European call options. The formula takes into account the current stock price, the strike price, the risk-free rate, the volatility of the stock, and the time to maturity. The terms N(0.2) and N(0.1) represent the cumulative distribution function of the standard normal distribution evaluated at certain points, which are determined by the inputs. The correct configuration of these terms, given the parameters, is 20N(0.2)-19.7N(0.1), which correctly reflects the formula's application to the given scenario.

When the Non-Dividend Paying Stock Price Is $20,the Strike Price