An analyst is interested in using the Black–Scholes model tovalue call options on the stock of Ledbetter Inc. The analyst has accumulated the followinginformation:The price of the stock is $33.The strike price is $33.The option expires in 6 months (t 5 0.50).The standard deviation of the stock’s returns is 0.30, and the variance is 0.09.The risk-free rate is 10%.Given that information, the analyst is able to calculate some other necessary componentsof the Black–Scholes model:d1 = 0.34177d2 = 0.12964N(d1) = 0.63369N(d2) = 0.55155N (d1) and N (d2) represent areas under a standard normal distribution curve. Using theBlack–Scholes model, what is the value of the call option?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
An analyst is interested in using the Black–Scholes model to
value call options on the stock of Ledbetter Inc. The analyst has accumulated the following
information:
The price of the stock is $33.
The strike price is $33.
The option expires in 6 months (t 5 0.50).
The standard deviation of the stock’s returns is 0.30, and the variance is 0.09.
The risk-free rate is 10%.
Given that information, the analyst is able to calculate some other necessary components
of the Black–Scholes model:
d1 = 0.34177
d2 = 0.12964
N(d1) = 0.63369
N(d2) = 0.55155
N (d1) and N (d2) represent areas under a standard
Black–Scholes model, what is the value of the call option?
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