Dhanashre (Costing) 24 September 2012
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)|
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) ?
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john_laphadi (Accounts-Executive) 25 September 2012
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 ..
Solving by intrapolation method for above problem: As shown by Mr Lapadi
.55 = 0.7088
0.60 = 0.7257
[(0.5817-0.5500) / (0.60 - 0.55)] X [0.7257 - 0.7088]
= [0.0317/0.05] X 0.0169
Hence N(.5817) = 0.7088 + 0.0107146 = 0.7195. This is the same as Mr Laphadi has shown
IInd Method : Or you can use the table
d1 = 0.5817. See the table for 0.5 under 8 and that is equal to 0.7190.
Then 0.17 x (0.7224-0.7190) = 0.000578 ( Note: 0.7224 is the value in table after 0.7190)
Then Add 0.7190 + 0.000578 and you get 0.7195.