Consider a call option with a strike price of $10, which expires in one year. The risk-free rate of interest is 10 percent. The current underlying stock price is $30. Without arbitrage, which of the following is a possible price for the call option? (Round intermediate computations to two decimal places.)

Question

Quizplus · Accepted Answer

The Black-Scholes model gives us that the price of a call option is $21.00. Since there is no arbitrage, the actual price of the option cannot be higher than this theoretical value. Therefore, C is the best choice. A and D are not possible since the option cannot have a negative or zero value when the stock price is above the strike price. B is also not possible since it is lower than the theoretical value.

Consider a Call Option with a Strike Price of $10