- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 38. Valuation of Contingent Claims
- Subject 4. Black-Scholes-Merton Option Valuation Model
CFA Practice Question
In the BSM model for a call option, d1 is calculated as -0.49 and d2 is 0.58. If you want to replicate the call option payoffs with stocks and zero-coupon bonds, you should long ______.
A. stocks and short bonds
B. bonds and short stocks
C. stocks and bonds
Explanation: To replicate the call options you should long stocks and short bonds. In this case you should long N(d1) stocks and short N(d2) bonds. Note N(d1) = N(-0.49) = 1 - N(0.49).
User Contributed Comments 2
| User | Comment |
|---|---|
| cminor | Put call parity formula. |
| mtsimone | You're right, @cminor. If you get hung up on d1 and d2 it's just a distraction. Put/Call keeps it simple. |