Example: Using the given data calculate the value of a call and put

option as per Black and Scholes model.

Stock Price `120
Time to expire 3 Months (t = 0.25 years)
Risk free rate of interest 10% p.a. continuously compounded
Standard deviation of 0.6
stock
Exercise price `115

Ans: The values of d1 and d2 as shown below:

2
1 n(120/115 )+(0 .10+0 .5×0 .6 )(0. 25 )
d1= =0 .37
0 .6 √ 0 . 25
2
1 n(120 /115 )+(0 . 10−0 .5×0 . 6 )(0 . 25)
d 2= =0 . 07
0 . 6 √ 0. 25
From the table of the area under a normal curve, z = 0.37 (= d 1), the area
= 0.1443 and for z(= d2) = 0.07, the area = 0.0279.
These values give the areas between mean and the specified values of d 1
and d2.
The total areas under the normal curve to the left of d 1 and d2, which are
respectively 0.5 + 0.1443 = 0.6443 and 0.5 + 0.0279 = 0.5279. Thus,
N(d1) = N(0.37) = 0.6443, N(d2) = N(0.07) = 0.5279.
115
0 .10( 0. 25 )
The value of the call is: C = 120 × (0.6443) – e (0.5279)
= `18.11

Calculation of Put Option Value

Using the put-call parity, the put option value as follows:
P = C + Ee–rt – S0 = 18.11 + 115 e– (0.10) (0.25) – 120 = `10.27
Using the put-call parity model, the put option value is given below:
P = Ee– rt N(– d2) – S0 N(– d1)
where, E = `115, r = 0.10, t = 0.25, S0 = `120, d1 = 0.37 and d2 = 0.07.
Accordingly, N(– d1) = N(– 0.37) = 0.3557 and N(– d 2) = N(– 0.07) =
0.4721
Now, P = 115 × e– 0.10 × 0.25 × 0.4721 – 120 × 0.3557 = 52.95 – 42.68 =
`10.27

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