Reference no: EM131795929

Problem - An analyst wants to use the Black-Scholes model to value call options on the stock of Ledbetter Inc. based on the following data:

• The price of the stock is $40.
• The strike price of the option is $40.
• The option matures in 3 months (t = 0.25).
• The standard deviation of the stock's returns is 0.40, and the variance is 0.16.
• The risk-free rate is 6%.

Given this information, the analyst then calculated the following necessary components of the Black-Scholes model:

• d1 = 0.175
• d2 = -0.025
• N(d1) = 0.56946
• N(d2) = 0.49003

N(d1) and N(d2) represent areas under a standard normal distribution function.  Using the BlackScholes model, what is the value of the call option?

a. $2.81

b. $3.12

c. $3.47

d. $3.82

e. $4.20