Question 2

Consider the Black-Scholes model of option pricing that we have studied in our lectures. Determine the current price of a European call option on a non-dividend paying stock when the stock price is $20 (per share), the strike price is $18, the risk-free rate of interest is 6% per year with continuous compounding, the volatility is 30% per year, and the time to maturity is 6 months. (note: standard normal probability tables are provided in the Appendix.)