Black Scholes

The inputs to the Black-Scholes model are the current impairment of the underlying plus (S), the form or strike price of the alternative (K), the time to expiration of the option in fractions of a year (t), the section of the underlying asset (cr2), and the continuously-compounded risk-free interest rate (r). In this problem, the inputs are:S = $55 ?2 = 0.0625 K =$50 r = 0.10 t = 1 After identifying the inputs, solve for dl and d2: dl = [In(S/K) + (r + 0.5*?2)(t) ] / (?2t)1/2 = [In(55/50) + {0.10 + ½(0.0625)}(1) ] / (0.0625*1)1/2 = 0.9062 d2 = dl- (?2t) 1/2 = 9062 - (0.0625*1) 1/2 = 0.6562 Find N(dl) and N(d2), the area under the conventionality sprain from negative eternity to dl and negative infinity to d2, respectively. N(dl) = N(0.9062) = 0.8176 N(d2) = N(0.6562) = 0.7442 check to the Black-Scholes formula, the price of a European call option (C) on a non-dividend paying common stock is: C = SN(dl) - Ke-rtN(d2) = (55)(0.8176) - (50)e-(. 10)(1) (0.7442) = $11.30 The Black-Scholes determine of the call option is $11.30.

For Part 2 and 3, revel indicate to the Excel spreadsheet. The Black Scholes look ons can be computed precise handily using EXCEL. For the mathematical formulas, just enjoyment pound (x, 2.7182818) for the natural logarithmic matter, use exp(x) for the exponential function and normsdist (x) for the pattern normal distribution function. It can be slow famous that for part 2 the act is $8.24, and for part 3 the answer is $24.01. Hence its clear that the intrinsic value system is wrong and that option with stock price equaling the exercise price can be quite va! luable. ***END***If you fate to wedge a full essay, order it on our website: BestEssayCheap.com

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