1. Black-Scholes Model Applied to Equities, suppose we are given the following information on an underlying stock and options: S = 60, X = 60, Rf = 2%, T = 0.25, dividend yield = 2%, = 45%. Assume we are examining European-style options. Three Questions:

A.) Which answer best describes how the BSM model is used to value a call option with the parameters given?

1. The BSM model call value is the exercise price times N(d1) less the present value of the stock times N(d2).
2. The BSM model call value is the stock price times e^-(div yield) (t) N(d1) less the exercise price times e^-(div yield) (t) N(d2)
3. The BSM model call value is the stock price times e^-(div yield) (t) N(-d1) less the present value of the exercise price times e^-(div yield) (t) N(-d2).

B.) Which answer best describes how the BSM model is used to value a put option with the parameters given?

1. The BSM model put value is the exercise price times N(d1) less the present value of the stock price times N(d2).
2. The BSM model put value is the exercise price times e^-(div yield) (t)N(-d2) less the stock price times e^-(div yield) (t)N(-d2).
3. The BSM model put value is the exercise price times e^-(Rf) (t)N(-d2) less the stock price times e^-(div yield) (t)N(-d1).

C.) Suppose now that the stock does not pay a dividend-that is, div yield = 0%. Identify the correct statement:

1. The BSM model option value is the same as the previous problems because options are not dividend adjusted.
2. The BSM model option values will be different because there is an adjustment term applied to the exercise price, that is e^- (div yield) (t), which will influence the option values.
3. The BSM model option value will be different because d1, d2, and the stock component are all adjusted for dividends.