a) Explain how the Black-Scholes option pricing model builds on the binomial model. Where does it make extensions? Where is it similar? b) Use the Black-Scholes formula to calculate the price of a call option given the following information: S = $1.50 / £ , X = $1.55 / £ , r =1% , r* = 2% ,T = 1, o = 20% .

a) Explain how the Black-Scholes option pricing model builds on the binomial model. Where does it make extensions? Where is it similar? b) Use the Black-Scholes formula to calculate the price of a call option given the following information: S = $1.50 / £ , X = $1.55 / £ , r =1% , r* = 2% ,T = 1, o = 20% .

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter15A: Auction Design And Information Economics

Section: Chapter Questions

Problem 7E

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