Question

Consider an option on a stock where the stock price is $30, the strike price is $29, the continuously compounded risk-free rate of return is 5% per year, the continuously compounded standard deviation of its return is 25% per year and the time to maturity is 4 months. If this stock is due to go ex-dividend in 1.5 months and paying a dividend of $0.50 then the Black-Scholes price of a European call on the stock is closest to what number?

		$2.21
		$3.11
		$4.71
		$4.01
		$5.41

Answer 1

Based on the given data, the workings on European Call usinr Black - Scholes Model as below:

Stock	30
Strike	29
Volatility	25%
Risk Free Rate	5%
Term	0.33
Dividend Yield	2%
Calculation of:
d1	0.38
d2	0.24
Call Option	2.52