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Basic Question 9 of 12
Consider a stock that trades for $75. A call on this stock has an exercise price of $70 and it expires in 150 days. If the continuously compounding interest rate is 7% and the standard deviation for the stock's return is 0.35, compute the price of the call option according to the Black-Scholes-Merton model.
Below is the relevant part of the cumulative probabilities table for a standard normal distribution.
User Contributed Comments 6
| User | Comment |
|---|---|
| danlan2 | S=75 and X=70 |
| rhardin | The Schweser notes for 2010 say "it appears as though the candidate is no longer responsible for using the BSM model to actually price a call option." Is this true? I don't have the curriculum derivatives book with me, haha. |
| weiw | are we supposed to memorize the formula for bSM model? |
| Nando1 | Based on the LOS from reading 62, NO, we don't have to calculate an option price based on BSM. We do have to understand the BSM assumptions and how the input values impact the model. |
| ashish100 | Anyone calculated something else for d1 using that formula? |
| ashish100 | Nvm we good |
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Learning Outcome Statements
identify assumptions of the Black-Scholes-Merton option valuation model;
interpret the components of the Black-Scholes-Merton model as applied to call options in terms of a leveraged position in the underlying;
describe how the Black-Scholes-Merton model is used to value European options on equities and currencies;
CFA® 2025 Level II Curriculum, Volume 5, Module 32.