fm9 9 - distribution. Thus, N(d 1 ) and N(d 2 ) represent...

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Mini Case: 9 - 9 d. 2. Write out the three equations that constitute the model. Answer: The OPM consists of the following three equations: V = P[N(d 1 ) - t r RF Xe [N(d 2 )]. d 1 = t t )] /2 ( r [ ) P/X ln( 2 RF σ σ + + . d 2 = d 1 - t σ . Here, V = current value of a call option with time t until expiration. P = current price of the underlying stock. N(d i ) = probability that a deviation less than d i will occur in a standard normal
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Unformatted text preview: distribution. Thus, N(d 1 ) and N(d 2 ) represent areas under a standard normal distribution function. X = strike price of the option. e 2.7183. r RF = risk-free interest rate. t = time until the option expires (the option period). ln(P/X) = natural logarithm of P/X. 2 = variance of the rate of return on the stock....
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