A stock is currently priced at $45. A call option with an expiration of one year has an exercise price of $60. The risk-free rate is 14 percent per year, compounded continuously, and the standard deviation of the stock's return is infinitely large. What is the price of the call option?

Question

Quizplus · Accepted Answer

If the standard deviation is infinite, d₁ goes to positive infinity so N(d₁) goes to 1, and d₂ goes to negative infinity so N(d₂) goes to 0. In this case, the call price is equal to the stock price, which is $45.

A Stock Is Currently Priced at $45