Explanation

In the Black-Scholes-Merton model for European call options with dividends, the stock price S₀ must be adjusted by subtracting the present value of expected dividends.

Step 1: Calculate Present Value of Dividend

• Dividend amount: USD 1.25
• Time to dividend payment: 1 month = 1/12 year
• Risk-free rate: 3.5% per year

Present Value of Dividend = $1.25 \times e^{-0.035 \times (1/12)} = 1.2464$

Step 2: Adjust Stock Price

Adjusted S₀ = $60 - 1.2464 = 58.7536$

Step 3: Apply BSM Formula

Call option price = $S_0 \cdot N(d_1) - K \cdot e^{-rT} \cdot N(d_2)$

Where:

• S₀ = 58.7536
• K = 60
• r = 0.035
• T = 1 year
• N(d₁) = 0.570143
• N(d₂) = 0.522623

Calculation:

• First term: $58.7536 \times 0.570143 = 33.4978$
• Second term: $60 \times e^{-0.035 \times 1} \times 0.522623 = 60 \times 0.9656 \times 0.522623 = 30.2787$
• Call price = $33.4978 - 30.2787 = USD 3.2191 \approx USD 3.22$

Therefore, the correct call option price is USD 3.22.