Asked by Mahammed Bindawood on May 11, 2024
Verified
You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is ________ or the volatility you input into the model is too ________.
A) overvalued and should be written; low
B) undervalued and should be written; low
C) overvalued and should be purchased; high
D) undervalued and should be purchased; high
Black-Scholes Value
A model used to estimate the theoretical price of options and certain other financial instruments.
Call Option
A financial contract giving the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other assets at a specified price within a specific time period.
Volatility
The degree of variation of a trading price series over time, often used to gauge the risk in investments.
- Understand aspects that determine option prices, encompassing fluctuations in market conditions and time degradation.
- Comprehend the Black-Scholes model and its application to option pricing.
Verified Answer
Learning Objectives
- Understand aspects that determine option prices, encompassing fluctuations in market conditions and time degradation.
- Comprehend the Black-Scholes model and its application to option pricing.
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