Question

This question refers to the Black-Scholes-Merton model of European call option pricing for a non-dividend-paying stock. Please note that one or more of the answer choices may lack some mathematical formatting because of limitations of Canvas Quizzes. Please try to overlook such issues when judging the choices.

Which quantity can be interpreted as the present value of the strike price times the probability that the call option is in the money at expiration?

Group of answer choices

Gamma

K∙e^(rT)∙N(d2)

Delta

S∙N(d1)

Answer 1

Answer: Option(2) K.e^(rT).N(d2)

Here, Perfect answer should be K.e^(-rT).N(d2), this can be interpreted as the present value of the strike price times the probability that the call option is in the money at expiration

where,

K = Strike Price of the Option,

N(d2) = standard normal cumulative distribution function,

e = the exponential function to bring the Strike Price to Present value (Continous Compounding)

r = Rate of Interest

T = Time Remaining until expiration

Other Options:

Delta is the degree to which an option price will move given a small change in the underlying stock price

Gamma measures how fast the delta changes for small changes in the underlying stock price. i.e. the delta of the delta

S is the Current Stock Price, we want Strike price to be brought to present value but not current stock price.