Dear All,
Please guide how to calculate the value of N(d1) in following example -
| Number of S.D. from Mean, | (z) Area of the left or right (one tail) |
| 0.25 | 0.4013 |
| 0.3 | 0.3821 |
| 0.55 | 0.2912 |
| 0.6 | 0.2578 |
Price of stock now = Rs.80
Exercise price = Rs.75
Standard deviation of continuously compounded annual
return = 0.40
Maturity period = 6 months
Annual interest rate = 12%
d1 = 0.5187
How to calculate value of N(d1) ?
How to find out this value
To Dhanshree ,
i would like to give few info. on this question before further solving :-
1 . This question is already asked in CWA- JUNE 2007 for 8 marks.
2. ur info in above question is wrong realted to Z Area of 0.6 . The correct proability i.e 0.6 = 0.2743
3. ur d1 value is also wrong . The correct value of d1 after solving is d1 = 0.58168.
calculation of N(d1) = N(.58168) = ?
answer shown below :-
given table value for (Z = 0.55) = .2912
(Z = 0.60) = .2743
N(0.55) = 1- 0.2912 = .7088 (Refer explanation no. 1)
N(0.60) = 1- 0.2743 = .7257 (Refer explanation no. 1)
Explanation No. 1
as we know that total probability of table is 1 & in "one tail table" if z = +ve then it shows right side area probability of calculated Z (use right tail table).
now use interpolation technique in figures given below :-
.55 = 0.7088
.58168 = ?
.60 = .07257
from calculation using interpolation technique ,
we got value of N(d1) i.e. N(.58168) = 0.7195.
so , Dhanshree ur query has been solved out .. hope that further part of question will be done by your self ..
Thanks
J_Laphadi
Please explain using interpolation technique. Thanx in advance.
From 2 tail areas, divide by 2 to get 1 tail areas respectively.( 1-1 tail area) gives cumulative area. Do the interpolation to find result.
No.of sd. 2 tail. 1 tail cumulative
.25. .8026. .4013. .5987
.30. .7642. .3821. .6179
.55. .5823. .2912. .7088
CAclubindia
