In its first month of operations, Literacy for the Illiterate opened a new bookstore and bought merchandise in the following ord
1 answer:
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Answer:
Case 1: 0.4266
Case 2: 0.5987
Case 3: 0.7422
Explanation:
We will use the following formula to find d1 which is also given in the attachment below:
d1 = [ ln(S/K) + (r + 0.5 * s^2)*t ] / s * √t
Here
K is strike price and is $60
r is risk free rate which is 3%
s is annual standard deviation which is 20%
t is the option period which is 1 one year
<u>Case 1: Stock Price is $55</u>
Here K is $55. Putting values in the above equation, we have:
d1 = [ ln(55/60) + (3% + 0.5 * 20%^2)*1 ] / 20% * √1
d1 = -0.1851
By using the normal distribution table, we can calculate N(d1) which is:
N(d1) = 0.4266
<u>Case 2: Stock Price is $60</u>
Here K is $60. Putting values in the above equation, we have:
d1 = [ ln(60/60) + (3% + 0.5 * 20%^2)*1 ] / 20% * √1
d1 = 0.25
By using the normal distribution table, we can calculate N(d1) which is:
N(d1) = 0.5987
<u>Case 3: Stock Price is $65</u>
Here K is $65. Putting values in the above equation, we have:
d1 = [ ln(65/60) + (3% + 0.5 * 20%^2)*1 ] / 20% * √1
d1 = 0.6502
By using the normal distribution table, we can calculate N(d1) which is:
N(d1) = 0.7422
