1. The stock of the McCall Corporation is currently trading at $42 per share. The stock’s volatility as measured by its standard deviation is 20%. If the strike (exercise) price for a certain set of options on McCall stock carry a strike price of $40, and the options run for 6 months (180 days), determine the Black-Scholes model values for:

N (d1), N (d2), N (- d1), and N (- d2). (Assume the risk-free rate is 10% and that the stock pays no dividends.)

2. Given the information in question one (1) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine: a. The price (premium) one must pay for a call option (Ct) on McCall stock using the Black-Scholes model.

b. How much of the call’s value is composed of intrinsic value? How much of the call’s value is composed of a time premium? (Explain how you determined these values.)

3. Given the information in question one (1) above and your calculated values for N (d1), N (d2), N (- d1), and N (- d2), determine:

a. The price (premium) of a put option (Pt) for McCall stock using the BlackScholes model. (Use the put/call parity model to confirm your answer.)

b. How much of the put’s value (price) is composed of intrinsic value? How much of the put’s value is composed of a time premium? (Explain how you determined these values.)

These are the answers below, how do I get to them?

1. N (d1) = 0.7792 (where d1 = 0.7694) N (d2) = 0.7350 (where d2 = 0.6280) N (- d1) = 0.2208 N (- d2) = 0.2650

2. a. $4.76 (call price) b.

3. a. $0.81 (put price) b.

Answer rating: 100% (QA)

To calculate the BlackScholes model values for Nd1 Nd2 Nd1 and Nd2 we need to use the following form... View the full answer