Assume that the current price of DEY stock is $25, that a 1 year call option on the stock has a strike or exercise price of $27.50, 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

The Black-Scholes model for a call option is given by: C = S0*N(d1) - X*e^(-rt)*N(d2), where C is the call option price, S0 is the current stock price, X is the strike price, r is the risk-free rate, t is the time to expiration (in years), N(d1) and N(d2) are values from the cumulative distribution function for a standard normal distribution. Plugging in the given values: C = 25*N(0.5476) - 27.5*e^(-0.04*1)*N(0.4432) = 25*0.5476 - 27.5*e^(-0.04)*0.4432 = 13.69 - 11.71 = 1.98.

Assume That the Current Price of DEY Stock Is $25