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

The derivation of the Black-Scholes Option Pricing Model rests on the concept of ariskless hedge .

According to the Black-Scholes Option Pricing Model, as the time to expiration, t, increases, the value of the call optionincreases .

Merry Melon Fruit Company has a current stock price of $32.00. A call option on this stock has an exercise price of $32.00 and 0.49 year to maturity. The variance of the stock price is 0.04, and the risk-free rate is 7%. You calculated

1

d1to be 0.32 and N(0.32) to be 0.6255. Therefore,d

2

d2will be 0.18 and N(0.18) will be 0.5714. Using the Black-Scholes Option Pricing Model, what is the value of the option? (Note: Use 2.7183 as the approximate value of e.)

$1.996

$2.348

$2.465

$2.231