• Profile photo of John Moffat says

      Because that is was comes out of the equations!!!!

      The price of the share in 3 months could obviously be anything. However it is more likely that it will be less than 1.80 than more than 1.80, so the people selling the options will want to charge more for a put option because they are more likely to have to pay out on it.

      (and don’t ask me why the price is more likely to be less than 1.80 than more!! That is down to the statistics why is how the derived the formulae, and I have certainly no intention of going through their proof :-) )

    • Profile photo of John Moffat says

      Not all scientific calculators are the same – there are two different ways that they work. If yours does not have a +/- button then it uses a different logic, and you will have to look in the instruction book how to do it.

  1. Profile photo of waqas says

    In Example % while calculating value of call option on the third step u used e raised to power -.04… aint that wrong as time is .25 and r is .1 when we multiply that it comes to .025.. :O
    dont know how u came to to .04 :O
    waiting for ur reply

    • Profile photo of John Moffat says

      I assume you were happy in arriving at the figure of -0.6886 for D1 (the workings are at the end of the lecture notes as well).

      We look up 0.69 in the tables (we can only look up for 2 decimal places, so 0.6886 becomes 0.69). So do this you look along the 0.6 row and as you move through the columns it gives the figure for 0.60, 0.61, 0.62 and so on. We want 0.69 and so it is the 0.6 row and the 0.09 column, and the figure from the tables is 0.2549.

      Because D1 is negative, we subtract then 0.2549 away from 0.5.
      (Had it been positive, as D2 is, then we would add 0.5). This rule is given at the bottom of the tables.

      You should be able to follow the rest of the answer at the back of the Lecture Notes.

      (How did you manage to sort out the first four examples, but not example 5? :-))

  2. Profile photo of questforknowledge says

    John i have this question. it concerns calculatind d1 if a questions is given n i calculate d1 and a figure say 1.2812 and i then round it to 1.28 and another candidate calculates his and round it to 1.3. these two answers will give different values for N(d1) which will lead to a different value for a call option. will the two of us have all the marks. I am asking because when calculating the figure for natual log of Pa/Pe due to rounding candidates will have different answers
    thank you

    • Profile photo of John Moffat says

      Two things.

      Firstly most if not all of the marks are for proving you understand what is happening rather than for the final answer.
      Secondly, when rounding you should really round to the number of decimals needed for the tables, so why round to 1.3 when the tables allow you to look up 1.28 :-)

    • Profile photo of John Moffat says

      If it was a call option exercisable immediately, then the option gives you the right to buy a share at a fixed price.

      So, for example, if the current share price is $4.00 and you could buy an option giving you the right to buy the share at an exercise price of $3.70, then you could buy the share for $3.70 and immediately sell it for $0.30.
      Nobody is going to give you that right free! You would be prepared to pay $0.30 for the option. Then you could use it and buy a share for $3.70. You have then spent $4.00 in total and you own a share worth $4.00 :-)

      (But of course, that is only if the option were exercisable immediately. In practice the option will be the right to buy a share at a fixed price on a future date, and to get the value of that we need to use all the formulae.)

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