- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 32. Valuation of Contingent Claims
- Subject 4. Black-Scholes-Merton Option Valuation Model
CFA Practice Question
In the BSM model for a put option, d1 is calculated as 0.49 and d2 is -0.23. If you want to replicate the put option payoffs with stocks and zero-coupon bonds, you should long ______ bonds and short ______ stocks.
Correct Answer: 0.5910; 0.3121
For put options, the equivalent number of shares is -N(-d1) = - (1 - N(d1)) = - (1 - N(0.49)) = - (1 - 0.6879) = -0.3121. The equivalent number of bonds is N(-d2) = 1 - N(d2) = 1 - N(-0.23) = 1 - 0.4090 = 0.5910.
User Contributed Comments 2
| User | Comment |
|---|---|
| ruwanma | HI It seems the calcuation of 1-N(d2) is not correct ? it should be 1- N( -0.23)= 1-0.5910 = 0.4090 |
| RAMOST | Hi Ruwanma, they are using the normal cumulative distribution |