You’ve just been introduced to the Black-Scholes option pricing model and want to give it a try, and would like to use it to calculate the value of a call option on TriHawk stock. Currently, TriHawk’s common stock is selling for $25.00 per share, and the call option you are considering has an exercise or strike price of $20.00 with a maturity of 90 days or .25 year. In addition, you have calculated the (annualized) variance in its stock returns to be .09. If the risk-free rate of interest is 4 percent, what would the value of this call option be? How would your answer change if there was only one month left to expiration, but everything else remained the same? Now, what would happen to the value of this call option if the annualized variance in stock returns was .15 rather than .09?
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