fm17 12 - 17-10 a. The inputs to the Black and Scholes...

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Unformatted text preview: 17-10 a. The inputs to the Black and Scholes option pricing model are P = 5, X = 2, rRF = 6%, σ = 50%, and t = 2 years. Given these inputs, the value of a call option is calculated as: d1 = ln( P / X ) + [ rRF + σ 2 / 2]t σt = ln(5 / 2) + [0.06 + 0.5 2 / 2]2 0.5 2 = 1.8191 . d 2 = d1 − σ t = 1.819 − 0.5 2 = 1.1120 . Using Excel’s Normsdist function N(d1) = 0.9656, and N(d2) = 0.8669. This gives a value of the call option equal to: V = P[N(d 1)] − Xe -rRF t [N(d 2 )] = 5[0.9656] − 2e -0.06( 2 ) [0.8669] = 3.29 . b. The debt must therefore be worth 5-3.29 = $1.71 million. Its yield is 2.0 / 1.71 − 1 = 0.81 = 8.1% . c. At a volatility of 30% d1 = 2.6547 and N(d1) = 0.9960. d2 = 2.2304 and N(d2) = 0.9871. This gives an option value of $3.23 million. The debt value is then 5.0 – 3.23 = $1.77 million. Its yield is 6.3%. The value of the stock goes down and the value of the debt goes up because with lower risk, Fethe has less of a chance of a “home run.” Answers and Solutions: 17 - 12 ...
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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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