An analyst wants to use the Black-Scholes model to value call options on the stock of Heath Corporation based on the following data:
?
The price of the stock is $40.?
The strike price of the option is $40.?
The option matures in 3 months (t = 0.25).?
The standard deviation of the stock's returns is 0.40, and the variance is 0.16.?
The risk-free rate is 6%.Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:
?
d1 = 0.175?
d2 = ?0.025?
N(d1) = 0.56946?
N(d2) = 0.49003N(d1) and N(d2) represent areas under a standard normal distribution function. Using the Black-Scholes model, what is the value of the call option?
A. $2.81
B. $3.12
C. $3.47
D. $3.82
E. $4.20
Answer: C
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