Risk A1 Q4-1 Question 4. Option Pricing with Black-Scholes-Merton Model Today is January 12, 2017. The shares of XYZ Inc. are currently selling for $120 per share. The shares have an estimated...

Risk A1 Q4-1

Question 4. Option Pricing with Black-Scholes-Merton Model

Today is January 12, 2017. The shares of XYZ Inc. are currently selling for $120 per share. The shares have an estimated volatility of 25%. XYZ Inc. is also expected to pay a dividend of $1.50 with an ex-dividend date of January 25, 2017. The risk-free rate is 6.17 percent per year with continuous compounding. Assume that one call option gives the holder the right to purchase one share.

1. Use the Black-Scholes-Merton model to estimate the fair value of a European call option on XYZ shares, with exercise price of $125 and expiration date of March 21, 2017. (Note that 2017 is not a leap year.)