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?

P.S. I meant Pe is cost of project (example 1, Chapter 14) But anyway confused with Black Scholes model for share options and real options. There is a different approach

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.

Yes, but appreciate (as explained in the notes) you are no longer required to do the calculation in the exam. You get given a special spreadsheet when BSOP is needed.

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 ?

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?

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!

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?

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.

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’ 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.

Hi John, the answer for Example 4b in chapter 13 seems to be missing and I seem to be getting a minus (-321.57 cents). Is that correct or have I done something wrong?

AnnaSakhro says

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

AnnaSakhro says

P.S. I meant Pe is cost of project (example 1, Chapter 14)

But anyway confused with Black Scholes model for share options and real options. There is a different approach

claudia1 says

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.

John Moffat says

Yes, but appreciate (as explained in the notes) you are no longer required to do the calculation in the exam. You get given a special spreadsheet when BSOP is needed.

Nikitagarwal says

Can Someone please help me with this distribution table , how have they arrived at 0.2357

abokor says

sir, i heard that from sept 2022 excel formula will be provided to students to calculate the option price.

so my question, do we still need to be good at calculating the option price,

John Moffat says

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.

eloisedavey says

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

John Moffat says

Possibly because the should be a close brackets immediately before the ‘/’ , and also the 0.4*root(0.5) should be in brackets.

eloisedavey says

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!

John Moffat says

It seems there is an error in the printed answer. It should be -0.6865 and I will have it corrected.

konrad79 says

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!

John Moffat says

I am afraid that is the way that they are and the way that they are in tables that the ACCA provide 馃檪

khaikasu71 says

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.

khaikasu71 says

Okay, mr John never mind. I didn’t hear you say 0.4 TIMES Square root of 0.5 hahaha

sorry.

phetsoc says

Hi John

I am struggling with getting the 0.07 for d1 calculation, i keep getting 0.22

phetsoc says

I managed, thanks

John Moffat says

Great 馃檪

sindi2012 says

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.

bizuayehuy says

It is wonderful presentation for us who struggle as self study students!!!!!

John Moffat says

Thank you for your comment 馃檪

sindi2012 says

Hi Can you assist with getting 4b in example 4

karang says

Hi

How is log(290/260) is 0.1092 iam getting 0.047

Nikitagarwal says

Yeah same , can someone please help!

John Moffat says

Log to the base e, which is the ln button on calculators.

Petronilla09 says

Hi John,

I’m battling with getting the answer for Call option. The e^-rt is my challenge. I got that of question 3 but having difficulty for this?

Is there a solution to work me through?

Petronilla09 says

My question is for number 4.

I got my answers d1 and d2 as – 0.6865 and – 0.8865 respectively.

Kindly put me through on the e for number 4.

John Moffat says

There is a printed answer in the lecture notes, as for all examples.

sxhawty says

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.

John Moffat says

Thank you for your comment 馃檪

rmundra says

Which key on the scientific calculator is e ?

John Moffat says

The one with ‘e’ printed on it. All scientific calculators should have an ‘e’ button.

rmundra says

Got it!

thank you so much

ankit9752 says

what is the answer of example 4 b because I am getting the negative put option value i.e

P=4 -150+(180*0.2)

= -110 cent approx…

John Moffat says

The answer is approximately 30 cents.

Using the put call parity formula, p = 4 – 150 + 180 x e^ (- (0.10 x 0.25))

= 4 – 150 + 180 / 1.0253 = 4 – 150 + 176 = 30

lusaibmtr says

How its getting .2828 for 0.40root 0.50

John Moffat says

The suare root of 0.5 is 0.7071. Multiply by 0.4 and you get 0.2828

SHIVAKIRAN says

Hi John,

In 3rd example: How did you arrive at e= 9704. Please help. Thanks!

John Moffat says

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.

danique says

Hi, I’m not getting a negative for example 4 part a

danique says

I don’t know if I’m not calculating something correct but I’m still not getting the answer for example 4 part a

ln (150/180) + (0.1 + 0.5(0.4 squared) *0.25 is the number for?

njmb says

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

Akua says

Hi John, the answer for Example 4b in chapter 13 seems to be missing and I seem to be getting a minus (-321.57 cents). Is that correct or have I done something wrong?

Akua says

Hi John, please ignore i think i have got it now, haha. it is 29.55 cents. Thanks

John Moffat says

No problem 馃檪