Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: theory and practice. Australia: South-Western.

Chapter 8 Mini Case P. 371

e. In 1973, Fischer Black and Myron Scholes developed the Black-Scholes option pricing model (OPM).

(1) What assumptions underlie the OPM?

(2) Write out the three equations that constitute the model.

(3) According to the OPM, what is the value of a call option with the following characteristics?

Stock price $27.00

Strike price $25.00 Time to expiration 6 month 0.5 years

Risk-free rate 6.0%

Stock return standard deviation 0.49