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# Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is \$30, (2)excise price is \$35, (3) time to expiration is 4 months, (4)annualized risk-free rate 5%, AND (5) variance of stock return is 0.25.

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1. Use the Black-Scholes Model to find the price for a call option with the following inputs: (1) current stock price is \$30, (2)excise price is \$35, (3) time to expiration is 4 months, (4)annualized risk-free rate 5%, AND (5) variance of stock return is 0.25.

2. The current price of a stock is \$15. In 6 months, the price will be either \$18 or \$13. The annual risk-free rate is 6 percent. Find the price of a call option on the stock that has an excercise price of \$14 and that expires in 6 months. Hint, use the daily compounding.

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Question 1
The B-S formula for call options is the following:

c = S*N(d1) - X*exp(-r(T-t))*N(d2)

where

S is the price of the underlier (price of the stock) = \$30
r is the risk free interest rate = 0.05
T - t is the time left to expiry = 1/3 (four months, or one third of a year)
X is the strike price = \$35
N( ) is the the cumulative distribution function for a standard normal random variable.

and

d1 = ( ln(S/X) + (r +0.5*s^2)*(T - t ) ) / (s*sqrt(T-t))
d2 = d1 - s*sqrt(T-t)

where s^2 is the variance of the stock = 0.25 (so s = 0.5)

After plugging all the appropiate values, we get:

d1 = -0.3319...
d2 = -0.6206...

c = 1.8938...

So ...

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