Black Scholes

The inputs to the Black-Scholes model are the current expenditure of the underlying sum total (S), the form or strike price of the alternative (K), the geo lumberical era to expiration of the option in fractions of a year (t), the part 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 kink up 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 harmonize 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) = (5 5)(0.8176) - (50)e-(.10)(1) (0.7442) = $11.30 The Black-Scholes toll of the call option is $11.30.

For Part 2 and 3, revel squeeze up to the Excel spreadsheet. The Black Scholes look ons can be computed really handily using EXCEL. For the mathematical formulas, just enjoyment log (x, 2.7182818) for the natural logarithmic matter, use exp(x) for the exponential function and normsdist (x) for the hackneyed normal distribution function. It can be slow remark that for part 2 the coiffe is $8.24, and for part 3 the answer is $24.01. Hence its clear that the intrinsic value method acting is wrong and that option with stock price equaling the exercise price can be quite valuab le. ***END***If you fate to get a full e! ssay, order it on our website: OrderEssay.net

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