Assume that you have been given the following information on Purcell Industries:
ID: 2779211 • Letter: A
Question
Assume that you have been given the following information on Purcell Industries:
Current stock price = $15 Stock price of option = $15
Time to maturity of options = 6 months Risk free rate = 6%
Varience of stock return = 0.12
d1 = 0.24495 N(d1) = 0.59675
d2 = 0.00000 N(d2) = 0.50000
Accoding to the Black-Scholes option pricing model, what is the option's value?
SHOW ALL WORK AND FORMULA TO SUPPORT ANSWER
Explanation / Answer
We have following formula for value of call option:
C= SN(d1) –KN(d2)e^(-rt)
S= spot price
N = cumulative standard normal distribution
N(d1)= Z(d1) =Z(0.24495)=0.59675
N(d2)= 0.50
K= Strike price
R=risk free rate
T= time in years
Plugging the values in the formula, we get:
C=15x0.59675– 15x.50xe^(-0.06x0.5)
C=8.95125 -7.27834
= 1.6729