7. The Black-Scholes option pricing model

The BlackScholes option pricing model (OPM) was developed in 1973. The creation of the BlackScholes OPM played a significant role in the rapid growth of options trading.

The derivation of the BlackScholes Option Pricing Model rests on the concept of a .

According to the BlackScholes Option Pricing Model, if the current stock price, P, increases, the value of the call option will .

Big Walnut Nut Company has a current stock price of $17.00. A call option on this stock has an exercise price of $17.00 and 0.49 year to maturity. The variance of the stock price is 0.09, and the risk-free rate is 6%. You calculate d to be 0.25 and N(0.25) to be 0.5987. Therefore, d will be 0.04 and N(0.04) will be 0.5160. Using the BlackScholes Option Pricing Model, what is the value of the option? (Note: Use 2.7183 as the approximate value of e.)

$1.328

$1.577

$1.660

$1.411