Answer to Question #6212 in Economics of Enterprise for LaMarcus Streeter

Question

5. An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. 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) = 0.49003

N(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