Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. 1/ The current price of a stock is $22, and at the end of one year its price will be either $27 or $17. The annual risk-free rate is 6.0%, based on daily compounding. A 1-year call option on the stock, with an exercise price of $22, is available. Based on the binominal model, what is the option's value? a. $2.43 b. $2.70 c. $2.99 d. $3.29 e. $3.62 2/. 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: d 1 = 0.175 d 2 = -0.025 N(d 1) = 0.56946 N(d 2) = 0.49003 N(d 1) 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,Thank you. the answers is 1/ $2.99 2/$3.47 Please Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.
Paper#5653 | Written in 18-Jul-2015Price : $25