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Business / Finance / Q&A Library / The company offered its investors option contracts to buy their shares at P72 with the current price of P90. They were only given 90 days to exercise th…

The company offered its investors option contracts to buy their shares at P72 with the c…

Question

The company offered its investors option contracts to buy their shares at P72 with the current price of P90.
They were only given 90 days to exercise their rights. 52 week-high for the stock is P95 while the 52-week low is
P70. The T-bill rate is 7.32%.

REQUIRED:

1. Value of Nd1. (Use 4 decimal places)

2. Value of Nd2. (Use 4 decimal places) 
3. Volatility rate. (Use percentage and at least, two decimal places) 
4. Value of the call option. (Use two decimal places) 
5. Value of the put options. (Use two decimal places) 

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Step 1 Tagged in

Since you have posted a question with multiple sub-parts, we will solve the first three sub-parts for you. To get Business Finance Black scholes model
the remaining sub-part solved please repost the complete question and mention the sub-parts to be solved.
Stock options

Step 2 The Black Scholes model for option pricing:

The option pricing has two most important models such as the Black Scholes model and the binomial model. Knowledge Booster
The Black Scholes model determines the price of call and put option with the help of strike price, spot price,
risk-free rate, volatility rate, time, and other factors.  Learn more about this topic with our new Knowledge
Booster section down below.
The Nd1 and Nd2 are commutative normal probability values of d1 and d2. These values can determine with
the help of commutative normal distribution tables. keyboard_arrow_downSee content below
Step 3 Calculation:

The given information:

The company offered its investors option contracts to buy their shares at P72 with the current price of P90.
They were only given 90 days to exercise their rights. 52 week-high for the stock is P95 while the 52-week low is
P70. The T-bill rate is 7.32%.

Part 1) Value of Nd1:

The value of Nd1 and Nd2 require the volatility rate. So we will solve part 3 for it.

The volatility rate= {(High stock price-Low stock price)/High price} x100

                            ={($95-$70)/$95}x100

                            ={($15/$95)}x100

                            =15.789%

Now the Nd1 and Nd2 are as follows with the above information:

Step 4

Firstly we have to determine d1:

Now, Nd1 is  can determine using the cumulative normal distribution table:

N(d1)=N(3.1182)=N(3.11)+0.82[N(3.12)-N(3.11)]

                           =0.9991+0.82[0.9991-0.9991)]= =0.9991+0

                   Nd1 = 0.9991

Step 5 Part b) The value  of Nd2:

d2 can determine with the help of d1. The d2 would be as follows:

Now, Nd2 is  can determine using the cumulative normal distribution table:

N(d2)=N(3.0934)=N(3.09)+0.34[N(3.10)-N(3.09)]

                           =0.999+0.82[0.999-0.999)]= =0.9990+0

                   Nd2 = 0.9990

Step 6

Part 3) The volatility rate has been determined in the part 1.

The volatility rate is 15.78%.

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