Asked by Jamesetta Quiteh on May 29, 2024
Verified
The current stock price of KMW is $27, the risk-free rate of return is 4%, and the standard deviation is 30%. What is the price of a 63-day call option with an exercise price of $25?
A) $2.50
B) $2.65
C) $2.89
D) $3.12
Risk-free Rate
The theoretical rate of return of an investment with zero risk of financial loss, typically represented by the yield on government securities.
Standard Deviation
A measure of the dispersion or variation in a set of values, often used in finance to assess the volatility of an investment.
Call Option
is a financial contract that gives the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specific time period.
- Understand the Black-Scholes model and its utilization in determining the prices of options.
Verified Answer
d1 = = 0.7352
d2 = 0.7352 - 0.30 × = 0.6106
N(d1) = 0.7689
N(d2) = 0.7293
Call value = $2.65
Learning Objectives
- Understand the Black-Scholes model and its utilization in determining the prices of options.
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