Explanation:
According to the Black-Scholes-Merton model, the price of a European call option is calculated as: C = S * N(d₁) - K * e^(-rT) * N(d₂)
Given values:
S = $22
K = $20
r = 7% = 0.07
T = 3 months = 0.25 years
N(d₁) = 0.5522
N(d₂) = 0.5027
C = 22 * 0.5522 - 20 * e^(-0.07 * 0.25) * 0.5027 C = 12.1484 - 20 * e^(-0.0175) * 0.5027 C = 12.1484 - 20 * 0.98265 * 0.5027 C = 12.1484 - 9.8795 C = 2.2689
The closest value is $2.27.
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Q.86 The current stock price of LLP Limited is USD22. The volatility is 20%, and the risk-free rate is 7%. According to the Black-Scholes-Merton model, what should be the price of a European call option on LLP’s stocks with a strike price of USD20 and expiration of 3 months if N(d₁) and N(d₂) are assumed to be 0.5522 and 0.5027, respectively?
A
$2.27
B
$2.59
C
$2.98
D
$4.33
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