Question

In: Finance

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!!


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