Assume that the current price of DEY stock is $27.50, that a six-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

The Black-Scholes model for a call option's price 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, N(d1) and N(d2) are the cumulative distribution functions for d1 and d2, X is the strike price, r is the risk-free rate, and t is the time to expiration in years. Plugging in the given values: C = 27.50*0.5476 - 25.50*e^(-0.04*0.5)*0.4432, we find that the price closest to the calculation is $4.20, indicating that option B is correct.

Assume That the Current Price of DEY Stock Is $27