fm9 10 - + + = 2345 . 0575 . 0770 . + = 0.5736. d 2 = d 1-...

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Mini Case: 9 - 10 d. 3. What is the value of the following call option according to the OPM? Stock Price = $27.00. Strike Price = $25.00 Time To Expiration = 6 Months. Risk-Free Rate = 6.0%. Stock Return Variance = 0.11. Answer: The input variables are: P = $27.00; X = $25.00; r RF = 6.0%; t = 6 months = 0.5 years; and σ 2 = 0.11. Now, we proceed to use the OPM : V = $27[N(d 1 )] - $25e -(0.06)(0.5) [N(d 2 )]. d 1 = ) 7071 . 0 )( 3317 . 0 ( ) 5 . 0 )]( 0.11/2 06 . 0 [( ) $27/$25 ln(
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Unformatted text preview: + + = 2345 . 0575 . 0770 . + = 0.5736. d 2 = d 1- (0.3317)(0.7071) = d 1- 0.2345 = 0.5736 - 0.2345 = 0.3391. N(d 1 ) = N(0.5736) = 0.5000 + 0.2168 = 0.7168. N(d 2 ) = N(0.3391) = 0.5000 + 0.1327 = 0.6327. Therefore, V = $27(0.7168) - $25e-0.03 (0.6327) = $19.3536 - $25(0.97045)(0.6327) = $19.3536 - $15.3500 = $4.0036 $4.00. Thus, under the OPM, the value of the call option is about $4.00....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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