=

b. Elise takes her calculations and recommended price to Michael. He is very impressed, but he chuckles and indicates that a simple, closed-form approach exists for calculating the value of an option: the Black-Scholes formula. Michael grabs an investment science book from the shelf above his desk and reveals the very powerful and very complicated Black-Scholes formula:

where N[x] The Excel function NORMSDIST (x) where x d1 or x d2 P Current price of the stock K Exercise price t Number of weeks to exercise date Weekly volatility of stock Use the Black-Scholes formula to calculate the value of the call option and hence the price of the option. Compare this value to the value obtained in part a.