Question

The current stock price of Verizon is $64 and the stock does not pay dividends over the next three months. The risk-free rate is 5% a year. Consider a call option on this stock with a strike price of $55 and a maturity of 0.2 years from now. Using the Black-Scholes model, we have N(d₁ )=0.968 and N(d₂)=0.961. The value of the call under the model is ____.

O $0.173
O $60.57
O $9.62
O $6.61

Answer 1

Using the provided values and the Black-Scholes model formula, the value of the call option on Verizon stock is approximately $6.61.

Step-by-step explanation:

The value of the call option on Verizon stock using the Black-Scholes model is calculated by the following formula: Call Value = S * N(d1) - K * e^(-rt) * N(d2), where S is the current stock price, N(d1) and N(d2) are values derived from the cumulative normal distribution function, K is the strike price, r is the risk-free interest rate, and t is the time to maturity.

Using the information provided: S = $64, N(d1) = 0.968, N(d2) = 0.961, K = $55, r = 0.05, and t = 0.2 years, we can calculate the call value.

The call value would then be $64 * 0.968 - $55 * e^(-0.05 * 0.2) * 0.961. Simplifying this, we get approximately $6.61.

It is important to note that in this scenario, the stock does not pay dividends over the specified period, a factor in determining the value of the option.