A European call option on a zero-coupon bond has a strike price of $92 and 2 years
remaining till expiry (T - t). The current price of the bond is $85. Expected return volatility (σ
"sigma") is 18%. Risk-free rate is 6%. Calculate the option’s price using Black-Scholes
formula. You can find the corresponding cumulative probability values for d1 and d2 from the
table of z-values provided (use Z-table).
Why would this option always have a positive value under the Black-Scholes formula?
Explain by discussing the inputs and assumptions of the Black-Scholes formula.
