CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

A put expires in 150 days and has an exercise price of $100. The underlying stock is worth $105 and has a standard deviation of 0.2. The continuously compounded risk-free rate is 5.5%. Assume that the stock will pay a dividend of $3 on day 50. The price of the option should be ______.
A. $3.19
B. $7.44
C. $2.10
Explanation: The present value of the $3 dividend is: $3 e -0.055 (50/365) = $2.98.

Adjust the price of the underlying to S0 = 105 - 2.98 = $102.02
d1 = {ln(102.02 /100) + [0.055 + (0.2)2/2] (150/365)} / [0.2 (150/365)1/2] = 0.16
d2 = 0.16 - 0.2 (150/365)1/2 = 0.03
N(d1) = N(0.16) = 0.5636
N(d2) = N(0.03) = 0.5120
c = 102.02 x 0.5636 - 100 e-0.055 (150/365) x 0.5120 = 7.44
p = 100 x e -0.055 (150/365) x [1 - 0.5120] - 102.02 x [1 - 0.5636] = 3.19

User Contributed Comments 6

User Comment
wink26 How do we calculate, or know, N(d1) and N(d2) without a table?
humanitaire I don't think we are required to know that by the way...
ptyson I gave up on this one as we didn't have the table!
LloydBraun7 Don't get the D1 calculation...I get [0.0199 + (0.055 + 0.02)*0.411]/0.1282 = 0.3958.

Any ideas where I went wrong?
JohnnyWu Pretty frustrating without the table.
kchoi I agree with the calculations by ptyson...
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