APPLICATION To find the value of European put options, its intrinsic value and time value, and checking

put call parity relationship You are required to: Input data in Yellow cells only Fill in the values of following five determinants of option price: a) Spot price of the underlying asset, b) Exercise price, c) Time to expiry, d) Risk free interest rate, and e) Volatility estimate (standard deviation) THE OUTPUT: Output is in Red Call Value Value of Put, its Intrinsic Value and Time Value Checking Put Call Parity GO TO SHEET MARKED "BSM Put"

its intrinsic value arity relationship

Yellow cells only nants of option

BLACK SCHOLES MODEL FOR DETERMINING THE PRICE OF AN Fill the values: Spot Price, S Exercise Price, X Interest Rate, r Standard Deviation, Time to expiry, t

Black Scholes Option Pric Rs 450.00 Rs 490.00 6.00% 28.85% 3 0.25 d1 = -0.4142 d2 = -0.5585 Spot * N(d1) = PV of X = PV of X * N(d2) =
where d1 = and

c = SN(d1 ) - Xe-r

p.a p.a. months years

ln(S/X)+ (r d2 =

ln(S

and value of put, p: N(d1) = 0.3394 N(d2) = 0.2883 152.7300 482.7049 139.1638 Spot*N(-d1) = PV of X*N(-d2) =

CALL Value PUT Value Intrinsic Value of the Put Option = Max( 490 - 450, 0) = Time Value of the Put Option = Price - Intrinsic Value Checking PUT CALL PARITY PUT CALL PARITY Value of PUT as per Put Call Parity

ETERMINING THE PRICE OF AN EUROPEAN PUT Black Scholes Option Pricing Model for value of the call, c:
c = SN(d1 ) - Xe-rtN(d2 ) where d1 = and ln(S/X)+ (r + 2 /2)t t d2 = ln(S/X)+ (r - 2 /2)t t ; or d2 = d1 - t

and value of put, p: N(-d1) =

p = Xe-rtN(-d2 ) - SN(-d1 )
0.6606

N(-d2) = 0.7117 Spot*N(-d1) = 297.2700 PV of X*N(-d2) = 343.5410 Rs 13.57 Rs 46.27 Rs 40.00 Rs 6.27 Rs 46.27

- Intrinsic Value

= 46.27 - 40.00 = p = PV of X - S + c =