Question

Xyz corporation will pay a $2 per share dividend in two months. Its stock price currently is $65 per share. A European call option on XYZ has an exercise price of $55 and 3-month time to expiration. The risk-free interest rate is 0.55% per month, and the stock's volatility (standard deviation) = 14% per month. Find the Black-Scholes value of the option.

Answer 1

To find the Black-Scholes value of the European call option on XYZ, we need to use the Black-Scholes formula and input the given values.

Step-by-step explanation:

To find the Black-Scholes value of the European call option on XYZ, we need to use the Black-Scholes formula. The formula is as follows:

C = SN(d1) - Xe^(-rt)N(d2)

Where:

• C is the call option price
• S is the stock price
• N() is the cumulative standard normal distribution function
• d1 = (ln(S/X) + (r + (sigma^2)/2)t) / (sigma * sqrt(t))
• d2 = d1 - sigma * sqrt(t)
• X is the exercise price
• r is the risk-free interest rate
• t is the time to expiration
• sigma is the stock's volatility (standard deviation)

Using the given values, we can input them into the formula to calculate the Black-Scholes value of the option.