Question

Consider a 1-year option with exercise price $55 on a stock with annual standard deviation 25%. The T-bill rate is 2% per year. Find N(d₁) for stock prices $50, $55, and $60. (Do not round intermediate calculations. Round your answers to 4 decimal places.)

S	N(d1)
$50
$55
$60

Answer 1

At Stock Price $50

Now, by using Cumulative Area Table

No. of SD from mean	Cumulative Area
-0.2	0.4207
-0.1	0.4602

By Interpolation Method,

N(-0.1766) = 0.4207 + 0.0395 * (0.0234 / 0.1)

N(-0.1766) = 0.6942

At Stock Price $55

Now, by using Cumulative Area Table

No. of SD from mean	Cumulative Area
0.2	0.5793
0.3	0.6179

By Interpolation Method,

N(0.205) = 0.5793 + 0.0386 * (0.005 / 0.1)

N(-0.1766) = 0.5812

At Stock Price $55

Now, by using Cumulative Area Table

No. of SD from mean	Cumulative Area
0.5	0.6915
0.6	0.7257

By Interpolation Method,

N(0.5534) = 0.6915 + 0.0342 * (0.0534 / 0.1)

N(0.5534) = 0.7098