Company NYY’s stock is trading at $27. The annual standard deviation of stock returns is
15%. The annual effective interest rate is 2%. Assuming no active option markets, an investor
can replicate the payoffs of a call option with $24 exercise price by:
The following steps show the calculations of a replicating portfolio based on the Black Scholes model (Formula view of the spreadsheet is provided in next screenshot):
So the replication includes borrowing $18.83 and buying 0.8398 shares of NYY. This will have the same payoff as a call option.
Formula view:
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Company NYY’s stock is trading at $27. The annual standard deviation of stock returns is 15%....
Consider a 1-year option with exercise price $40 on a stock with annual standard deviation 15%. The T-bill rate is 2% per year. Find N(d1) for stock prices $35, $40, and $45.
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standard deviation is 15% and stock price is 50
exercise price is 50
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