In 1973, Fischer Black and Myron Scholes developed the Black-Scholes Option Pricing Model (OPM).

(1) What assumptions underlie the OPM?

(2) Write out the three equations that constitute the model.

(3) What is the value of the following call option according to the OPM?

Stuck price = $27.00

Strike price = $25.00

Time to expiration = 6 months

Risk-free rare = 6.0%

Stock return variance — 0.11

Assume that you have just been hired as a financial analyst by Triple Trice Inc., a mid-sized California company that specializes in creating high-fashion clothing. Because no one at Triple Trice is familiar with the basics of financial options, you have been asked to prepare a brief report that the firm’s executives can use to gain at least a cursory understanding of the topic.