In: Finance
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?
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!!