A NON-DIVIDEND-PAYING STOCK IS CURRENTLY TRADING AT USD 40 AND HAS...
11.
A non-dividend-paying stock is currently trading at USD 40 and has an expected return of 12% per year. Using
the Black-Scholes-Merton (BSM) model, a 1-year, European-style call option on the stock is valued at USD 1.78.
The parameters used in the model are:
N(d
1
) = 0.29123
N(d
2
) = 0.20333
The next day, the company announces that it will pay a dividend of USD 0.5 per share to holders of the stock
on an ex-dividend date 1 month from now and has no further dividend payout plans for at least 1 year. This
new information does not affect the current stock price, but the BSM model inputs change, so that:
N(d
1
) = 0.29928
N(d
2
) = 0.20333
If the risk-free rate is 3% per year, what is the new BSM call price?
a.
USD 1.61
b.
USD 1.78
c.
USD 1.95
d.
USD 2.11
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2015 Financial Risk Manager (FRM®) Practice Exam