Assume that the current price of DEY stock is $27.50, that a 6 month call option on the stock has a strike or exercise price of $25.50, the risk free rate is 4%, and that you have calculated N(d1) as .5476 and N(d2) as .4432. Use the Black-Scholes model to calculate the price of the option.

Question

Quizplus · Accepted Answer

Using the Black-Scholes model, we can calculate the option price as:

Option price = (stock price * N(d1)) - (PV(strike price) * N(d2))

where PV is the present value and is calculated as PV = strike price / (1 + risk-free rate)^(time until expiration)

PV = 25.50 / (1 + 0.04)^(6/12) = 25.03

Option price = (27.50 * 0.5476) - (25.03 * 0.4432) = 4.20

Therefore, the best choice is B.

Assume That the Current Price of DEY Stock Is $27