what is the meaning of ln in calculating d1 in black schols formula for real options?
how to calculate it ?
Q. No. 8 : Udhavji Ltd is considering a project requiring initial cash investment
of Rs.12m. The project is expected to generate annual cash inflow for 2 years,
the details given below:
Annual cash flow Probability
Rs.12m 0.24
Rs.8m 0.45
Rs.1m 0.31
Cost of capital is 16%.NPV?
Suppose the experience gained by implementing the project will provide the
company an option to start a new venture at the end of 2nd year. The required
investment would be Rs.8m. The new venture is expected to generate annual
cash inflow of years 3 and 4, the details given below :
Annual cash flow Probability
Rs.10m 0.20
Rs.9m 0.45
Rs.2m 0.35
The amount of required investment is certain and hence, it should be discounted
on the basis of risk free rate of return which is 7%. Variance of the new
venture’s return is 15%. Find the value of the option using Black-Scholes option.
Answer
t = 2 years Exercise Price = 8m r = 7% SD = √0.15 = 0.3873
Spot price =
[(10m x 0.20)+(9m x 0.45)+(2m x 0.35)].[(0.641 + 0.552)] = 8.05275 (the cash
inflows have been discounted at cost of capital i.e.16%)
ln(8.05275m/8m) = ln(1.0066) = 0.0066
here i can't understand how to calculate above line.
also how to calculate N(d1) with the help of d1? What is the value of N here?
please slove this question immidiately.
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