I'm having the most difficult time trying to figure out the BSOPM.
•S=18, X=15, r(f)=.03, var(x)=.04, t=18 months (1.5 years)
•Find d(1) first
•(LN(18/15)+(.03+.04/2)*1.5) / (.2*1.2247)=1.051
•The find d(2)=1.051-.2449=.8058
•Look each of these up on a normal probability table (it is ok to round to the closest value on the table):
•C = S N(d1) - X*e^(-rt)*N(d2)
•Intrinsic Value 18-15=3
•So time value is 4.0944-3=1.0944
• C is the market price of the call
• S is the current value of the underlying spot asset
• N(d1) is a complicated probability that most agree is the hedge ratio of a risk free spot/option portfolio.
• X is the exercise price or strike price
• e^(-rt) is a continuous time present value function
• N(d2) is another probability
My professor indicated that you can set this up in Excel and everything that i input his not correct. Is there a way to explain this so I can use it in Excel or overall? I can send over my Excel doc and may there is an issue with my formula.
I am unable to attach my document that provides further information, is there a way to send this via email?