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Option Pricing

This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.

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December 7, 2017 at 1:02 pm #421512
Shaharia
Participant
- Topics: 14
- Replies: 10
If d1=1.998
then N(d1)=0.5+0.4767=.9767
But in BPP text material it is written as
N(d1)=.5+.4767+82/100(.4772-.4767)
my question is why is that so and what is the reason behind using the 82/100 fraction? and is it possible to round the figure 1.998 as 2.
Thankyou.
December 7, 2017 at 3:40 pm #421603
John Moffat
Keymaster
- Topics: 57
- Replies: 54448
It is because N(d1) is to 4 decimal places, but you can only look up in the tables for 2 decimal places. So they have approximated between the table figures for 1.99 and 2.00.
However, if you round to 2 decimal places (and therefore use 2.00 here) then you will still get the marks. (If you have copied the figures correctly, then they should not have used 82/100 but 92/100, but I have not got the BPP Study Text and so I cannot check 🙂 )
December 9, 2017 at 4:46 am #422172
Shaharia
Participant
- Topics: 14
- Replies: 10
Sir, will you explain how the fraction 92/100 is calculated.
Thankyou.
December 9, 2017 at 7:07 am #422186
John Moffat
Keymaster
- Topics: 57
- Replies: 54448
The difference between 1.99 and 2.00 is 0.0100.
The difference between 1.99 and 1.998 is 0.008
0.0100 – 0.008 = 0.092, so 0.092/0.0100 or 92/100 🙂
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