Formula) The formula has two terms: C = S0N(d1), is the present value of the expected value of the stock price, conditional on the option expiring in-the-money discounted at the risk-free rate. The second term, is the present value of the expected payout of the exercise price at the expiration. N(d2) is the probability of exercise. All of this is based on the condition of risk neutrality, meaning that the probability distribution is based on a risk-free expected return on the stock…
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