3) A stock sells for 75. Using the M-K method, what is the standard deviation of...

3) A stock sells for 75. Using the M-K method, what is the standard deviation of this stock if a six month call option at 70 sells for 8.06 when the interest rate is 3.5?

Solutions

Expert Solution

Call price is given by as below:-

Now we can use find value of sigma using Hit and trail method as well as Excel.

I have calculated value of sigma in excel using above formula and putting different values for sigma till i got value of call option near 8.06

Sigma = 21%

Satisfied this.

C	8.06
R	3.5%
S0	75
K	70
T	0.5


Sigma	0.21
d1	0.65672	N(d1)	0.744319355
d2	0.508227	N(d2)	0.69435295

C	8.062428

d1 and d2 has been calculated easily using above mentioned formula's.

For N(d1) and N(d2) we have used "NORM.S.DIST(Z,TRUE)" formula.

Sigma satisfied above equation at 21%.

Please let me know if you have any further query.

Thank You!!

jeff jeffy answered 2 years ago

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