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Black and schole model

Dhanashre (Costing) (181 Points)

24 September 2012

Dear All,

Please guide how to calculate the value of N(d1) in following example -

Number of S.D. from Mean,	(z) Area of the left or right (one tail)
0.25	0.4013
0.3	0.3821
0.55	0.2912
0.6	0.2578

Price of stock now = Rs.80
Exercise price = Rs.75
Standard deviation of continuously compounded annual
return = 0.40
Maturity period = 6 months
Annual interest rate = 12%

d1 = 0.5187
How to calculate value of N(d1) ?

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9 Replies

Ravitej T (Associate) (96 Points)
Replied 25 September 2012

N(d1)=.74

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Dhanashre (Costing) (181 Points)
Replied 25 September 2012

How to find out this value

john_laphadi (Accounts-Executive) (196 Points)
Replied 25 September 2012

To Dhanshree ,

i would like to give few info. on this question before further solving :-

1 . This question is already asked in CWA- JUNE 2007 for 8 marks.

2. ur info in above question is wrong realted to Z Area of 0.6 . The correct proability i.e 0.6 = 0.2743

3. ur d1 value is also wrong . The correct value of d1 after solving is d1 = 0.58168.

calculation of N(d1) = N(.58168) = ?

answer shown below :-

given table value for (Z = 0.55) = .2912

(Z = 0.60) = .2743

N(0.55) = 1- 0.2912 = .7088 (Refer explanation no. 1)

N(0.60) = 1- 0.2743 = .7257 (Refer explanation no. 1)

Explanation No. 1

as we know that total probability of table is 1 & in "one tail table" if z = +ve then it shows right side area probability of calculated Z (use right tail table).

now use interpolation technique in figures given below :-

.55 = 0.7088

.58168 = ?

.60 = .07257

from calculation using interpolation technique ,

we got value of N(d1) i.e. N(.58168) = 0.7195.

so , Dhanshree ur query has been solved out .. hope that further part of question will be done by your self ..

Thanks

J_Laphadi

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