Problem 18-4 Black-Scholes model Assume you have been given the following inform

Question

Problem 18-4 Black-Scholes model Assume you have been given the following information on Purcell Industry: Current stock price = $16 Exercise price of option = $10 Time to maturity of option = 6 months Risk-free rate = 8% Variance of stock price = 0.12 d1 = 2.20456 d2 = 1.95961 N(d1) = 0.99 N(d2) = 0.97 Using the Black-Scholes Option Pricing Model, what would be the value of the option? Round your answer to two decimal places. My calculations thus far: V= P * Nd1 - Xe^(-rRF*t) * Nd2 V= (16 * .99) - [10 * e^(-.08*.5) * .97] V= 15.84 - 9.319658 V= 6.520342 I have entered 6.52 into cengage several times but it says this is wrong....could anyone tell me where I am going wrong here? Thanks in Advance

Explanation / Answer

Hi, The answer is 6.41. Difference is coming because you are taking rounded off values of Nd1 and Nd2. You should use Nd1 as 0.9863 and Nd2 as 0.9750 You need to round off your final answer and not the values of Nd1 and Nd2. Your equation will be: (16 * .9863) - [10 * e^(-.08*.5) * .9750] = 6.413 or 6.41 Hope, it solves your question. Thanks, Aman

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