Reference no: EM132727913

Problem - Assume that you have just been hired as a financial analyst by Triple Play Inc., a midsized California company that specializes in creating high-fashion clothing. Because no one at Triple Play is familiar with the basics of financial options, you have been asked to prepare a brief report that the firm's executives can use to gain a cursory understanding of the topic.

To begin, you gathered some outside materials on the subject and used these materials to draft a list of pertinent questions that need to be answered. In fact, one possible approach to the report is to use a question-and-answer format. Now that the questions have been drafted, you have to develop the answers.

In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM).

(1) What assumptions underlie the OPM?

(2) Write out the three equations that constitute the model.

(3) According to the OPM, what is the value of a call option with the following characteristics?

Stock price = $27.00

Strike price = 25.00

Time to expiration = 6 months = 0.5 years

Risk-free rate = 6.0%

Stock return standard deviation = 0.49