CFA Practice Question

There are 227 practice questions for this study session.

CFA Practice Question

Use the Black-Scholes-Merton model adjusted for cash flows on the underlying to calculate the price of a call option.

Underlying price: \$125
Exercise price: \$100
Continuously compounded risk-free rate: 5.25%
Time to expiration: 2 years
Volatility: 0.3
Continuously compounded dividend yield: 2%

Adjust the price of the underlying to S0 = 125 e -0.02 (2.0) = 120.1.
d1 = {ln(120.1/100) + [0.0525 + (0.3)2/2] 2.0} / [0.3 (2.0)1/2] = 0.89132
d2 = 0.89132 - 0.3 (2.0)1/2 = 0.4671
N(d1) = N(0.89132) = 0.8133
N(d2) = N(0.4671) = 0.6808
c = 120.1 x 0.8133 - 100 e-0.0525 (2) x 0.6808 = 36.38

User Comment
ssradja how should i know n(d1) or d2. i thought they should give the table so we can find the right number. anybody?
Smiley225 I cant see us being required to plug a bunch of figures BSM model in the exam....
mcspaddj What, we can't bring our laptops?
jperez049 Should the carrying benefit of 2% compound dividend yield also be considered when calculating d1? I can see the adjusted price of the underlying but not in the calculation of d1...