Assume that the current price of DEY stock is $25, that a one-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), and N(d1) and N(d2) are values from the standard normal distribution corresponding to d1 and d2 in the model. Plugging in the given values: C = $25*0.5476 - $27.50*e^(-0.04*1)*0.4432. Calculating this gives approximately $1.98, which matches option C.

Assume That the Current Price of DEY Stock Is $25