BSM - Kindly give a reply of this question..

pinalkaria87
Posts: 5
Joined: Thu Oct 04, 2012 11:12 pm

BSM - Kindly give a reply of this question..

Postby pinalkaria87 » Thu Oct 04, 2012 11:18 pm

A three-month European call option on the S&P 500 index is purchased at-the-money (ATM) when the index is at 1,400. The volatility of the index is 30.0% per annum and the dividend yield is 2.0% per annum. The risk-free rate is 3.0%. Assume that N(d1) = N(0.0917) = 0.54 and N(d2) = N(-0.0583) = 0.48. Which is nearest to the price of the call?

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: BSM - Kindly give a reply of this question..

Postby swarnendupathak » Tue Oct 16, 2012 11:44 am

Hi pinalkaria87,
You should use BSM formula to derive the call price, but So to be adjusted with the dividend yeild. The revised spot rate would be So*e^-(0.25*0.02)i.e.1400*e^-(0.25*0.02)= 1393.02. Then use the BSM call price formula i.e.
{So*N(d1)}-{X*e^-rt*N(d2)}.
Hope this will help you.

Regards
Swarnendu

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: BSM - Kindly give a reply of this question..

Postby content.pristine » Tue Oct 16, 2012 11:24 pm

Thanks Swarnendu,

The method you provided is absolutely right.

8-)


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