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##### Answer the following questions on a separate do...

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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-2015

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