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 )

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.

Sir,
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
thanks

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? :-))

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

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

I am sorry, but you can only download the course notes – the lectures can only be watched online.
It is the only way that we can keep this website free of charge.

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.)

sogan0 says

on example 5 why is the put option more epensive than call option?

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 )

kash says

am unable to calculator the figure for e.

I have a scientific one with e and ln.

which key to press for +-

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.

waqas says

Sir,

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

thanks

waqas says

example 5

John Moffat says

You are correct – it should be 0.025 (and the final answer should be 4c).

I will re-record the lecture.

waqas says

thanks

braske77 says

Please leave it like it is, makes us think, not just silly writing all down

John Moffat says

Good point Braske77 (and thank you )

sogan0 says

Im gettign lost in example 5 on the calculation of p on the e to the power of -0.04 what is the e value is it 2.7183

John Moffat says

Yes it is – and you must have a calculator with an ‘e’ button on it

sogan0 says

found the e button thanx

sogan0 says

Hi Tutor

Please give me an example on how to use the distribution table i got lost in Example 5 on the column 0.09 why that column?

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? :-))

sogan0 says

i only started practicing exmaple 5 then i got lost. Many thanx for your advice

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

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

mustafabilalqari says

How can I Have Lectures of Business Valuation

John Moffat says

There are no lectures yet on business valuation.

ALI says

How can i download this?or this is only for watching?

John Moffat says

I am sorry, but you can only download the course notes – the lectures can only be watched online.

It is the only way that we can keep this website free of charge.

ALI says

Can u provide me solution of paper strategic financial management 3.7 of december 2006 of ACCA………?

John Moffat says

I don’t think that I have it any longer – I will check later.

Do remember that the examiner (and the syllabus) has changed twice since then.

ALI says

okk,,,..

NEENA says

sir in example you taken t as 0.4 in formula of call option and put option i guess thats a mistake it should be 0.25 right?

NEENA says

i mean example 5.

John Moffat says

I have watched my lecture again, and it seems that I have taken ‘t’ as 0.25 correctly (it is ‘s’ that is 0.4).

You can of course check the answer at the back of the Course Notes. I think it is correct.

Lidia says

Dear John, it seems when calculating ‘-rt’ in example 6 (52,48 minute of the lecture and so on) you’ve multiplied 0,1 (r) by 0,4 instead of 0,25 (t)….

John Moffat says

Ooops – you are correct.

Sorry

sakura69 says

Thanks John!

ruth12 says

These are very well explained lectures and are a great help. Thank you sir and Open Tuition.

toobaalvi says

I have a very basic ques.. But its really confusing me. why the value of option is share price – excercise price?

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.)

tinashe says

thank u!

tinashe says

thank you