Question

Use the Black-Scholes formula to find the value of a call option based on the following inputs. [Hint: to find N(d1) and N(d2), use Excel normsdist function.] (Round your final answer to 2 decimal places. Do not round intermediate calculations.) Stock price $ 57 Exercise price $ 61 Interest rate 0.08 Dividend yield 0.04 Time to expiration 0.50 Standard deviation of stock’s returns 0.28

Answer 1

Stock price = $ 57

Strike Price = $ 61

Standard Deviation = 28%

Risk Free rate = 8%

Dividend Yield = 4%

d1 = [ln(57/61) + (0.08 + 0.28^2/2)*0.5]/[0.28*sqrt(0.5)] = -0.0415

d2 = -0.0415-(0.28*sqrt(0.5)) = -0.2395

N(d1) = 0.4834

N(d2) = 0.4054

Equity = $57*exp(-0.04*0.5)*(0.4834) - ($61*exp(-0.08*0.5))*(0.4054) = $ 3.248