Understanding Call Options with Black-Scholes Model

Medium Derivative Pricing And Valuation Options

Consider a European call option on a stock that is currently trading at $50. The option has a strike price of $55 and will expire in three months. Assume the risk-free interest rate is 2% per annum and the stock's volatility is 20%. Using the Black-Scholes option pricing model, which of the following statements is true regarding the value of the call option?

The call option will definitely be worth more than $5.

The call option's value can be calculated using the Black-Scholes formula.

The call option is expected to expire worthless.

Hint

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