32 time to maturity t is 05 measured in years hence 6

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Unformatted text preview: ndom walk Investors can hedge continuously and without costs Risk free rate is known Underlying asset does not pay dividend Example - Use Black-Scholes' formula to value the 6-month Google call-option Current stock price (P) is equal to 400 Exercise price (EX) is equal to 400 Standard deviation ( ) on the Google stock is 0.32 Time to maturity (t) is 0.5 (measured in years, hence 6 months = 0.5 years) 6-month interest rate is 2 percent - Find option value in five steps: o Step 1: Calculate the present value of the exercise price ƒ PV(EX) = EX · e-rt = 400 · e-0.04 · 0.5 = 392.08 o Step 2: Calculate d1: ƒ o d1 log>P / PV ( EX )@ V t  2 Vt log>400 / 392.08@ 0.32 0.5  2 0.32 0.5 0.2015 Step 3: Calculate d2: ƒ d2 d1  V t 0.2015  0.32 0.5 0.025 Download free ebooks at bookboon.com 85 Corporate Finance o o - Options Step 4: Find N(d1) and N(d2): ƒ N(X) is the probability that a normally distributed variable is less than X. The function is available in Excel (the Normdist function) as well as on m...
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