You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is or the volatility you input into the model is too .

A) overvalued and should be written; low
B) undervalued and should be written; low
C) overvalued and should be purchased; high
D) undervalued and should be purchased; high

Question

You calculate the Black-Scholes value of a call option as $3.50 for a stock that does not pay dividends, but the actual call price is $3.75. The most likely explanation for the discrepancy is that either the option is ________ or the volatility you input into the model is too ________.

A) overvalued and should be written; low
B) undervalued and should be written; low
C) overvalued and should be purchased; high
D) undervalued and should be purchased; high

Olivia Naylor · Accepted Answer

Final Answer : A, Explanation :  The actual call price being higher than the Black-Scholes calculated value suggests the option might be overvalued in the market, or the volatility input into the model was too low, leading to an underestimation of the option's value.

Definitions

Learning Objectives

Learning Objectives

Related questions