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Share options and option pricing (part 2) – ACCA (AFM) lectures

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  1. Hi John,
    1) When we calculate the share option value it`s enough to find C (call option) or P (put option). But when we calculate real option value (Chapter 14, Example 1) – value of real option is not a C (Call Option), we need to find the difference between C (Call option) and NPV (without option). Is that right?

    2) Trying to figure out what you said in Chapter 14, Example 1 – Pe (NPV without option) already with that factor of volatility. I thought Black Scholes model gives us formula to find how much this option costs for us. But in the case of real options, it gives us a new NPV number if we use the option. Why it`s not a value of option like in the case of share option?

    Thanks

  2. Good morning all. Just in case you are having problems with the e in the calculation, e is approximately 2.718. In the calculation 2.718^ -.o3,
    answer is same. That’s only if you are having problem with calculation. Hope this is useful.

    • When it is needed there is a special Black Scholes calculator provided (and you must practice using it on the ACCA website).

      You will not be required to use the formula yourself, but you are expected to understand the terms and the basic logic of it.

  5. Hi John, thank you for your great lectures ?

    Whenever I type the formula for D1 (example 3) into my calculator I keep getting a syntax error message coming up and I am not sure why, below is what I am typing to my calculator. Any idea what may be causing this please ?

    D1 = ((290/260) + (0.06+0.5(0.4)^2)0.5) / 0.4*root(0.5)

    Thanks

      • Got it thanks!

        For example 4 I am just a bit confused where your answer for D1 is coming from.

        I get – ln(150/180) + (0.1 + 0.5 (0.4^2))0.25 / (0.4 x (root 0.25))

        = -0.1823 + (0.1 + 0.08)0.25 / 0.2

        = (-0.1823 + 0.045) / 0.2

        = -0.6865

        The answer in the notes is -0.6886 and the number substituted into the formula look like they are in a different order to what was shown in the lecture. I know ultimately we look up to two d.p and so shouldn鈥檛 affect the answer too much but was just wondering if you could explain what may be causing this different please and why the method in the answer looks different?

        Thank you!

  6. Why N(d) tables confuses us by stating: If di>0, add 0.5 and if di<0 subtract from 0.5? It would be clearer to say always add 0.5 to the result, it gives same number and is easier to understand and remember!

  7. Hi Mr John. I answered example 3 and my answer is different from yours. the reason is because the answer for 0.4?0.5 if follows calculator is not 0.2828 but 0.1768.

    I pressed, 0.4 > shift > ^ >0.5 then I get 0.1768.

    So my working is In (290/260) + (0.06 + 0.5(0.16))0.5 divide by 0.1768

    my d1 is 1.014 , d2 is 0.834
    hence my N(d1) = 0.3447
    n(d2) = 0.7975

    so my c is (290 x 0.3447) – (260 x 0.7975)
    value for call option is 44 cents

    then value for put option is 6 cents (44 – 290 + 252)

    Is it because I misunderstood the formula s?t as 0.5 square root of 0.4?

    Please assist thank you.

  9. Hi John, example 3 call option i understand the answer been the price you will pay to buy the share should you excercise the call option. Put option is the right to sell, which is at 14.96cents. You explained that you understand why it is less. May you please explain.

  13. This explanation is perfect. I struggled trying to figure out how to find out the Nd and realised there could be a lecture video on this in Open tuition. Thank you sir! I’m currently self studying and this was very helpful.

    • e does not equal 9704!

      ‘e’ is a constant (like Pi), and you need a scientific calculator with ‘e’ on it.

      It is e^(- 0.03) that is equal to 0.9704. Depending on your calculator is might be easier for you to calculate it as 1 / (e^0.03), which is the same thing.

      • In(150/180) = -0.1823 (this is the negative value you get first)
        you then add
        [0.1+0.5(0.4squared)] *0.25 {equal 0.045}
        Result is -0.1373

        Divide by the denominator to get final d1 of -0.6866

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