Describe how a risk-free portfolio can be created using stocks and
options.
How can such a portfolio be used to help estimate a call option’s
value?
What is the purpose of the Black-Scholes Option Pricing Model?
Explain what a “riskless hedge” is and how the riskless hedge con-
cept is used in the Black-Scholes OPM.
Describe the effect of a change in each of the following factors on the
value of a call option:
(1) Stock price.
(2) Exercise price.
(3) Option life.
(4) Risk-free rate.
(5) Stock price variance; that is, riskiness of stock.
What is the value of a call option with these data: P $25; X $25;
rRF 8%; t 0.5 (6 months); s2 0.09; N(d1) 0.61586; and N(d2)
0.53287?
