Question

Consider a 1-year option with exercise price $65 on a stock with annual standard deviation 15%. The T-bill rate is 3% per year. Find N(d₁) for stock prices (a) $60, (b) $65, and (c) $70. (Do not round intermediate calculations. Round your answers to 4 decimal places.)

need detailed explanation please... hard to understand

S	N(d1)
$60	0.3913selected answer incorrect
$65	0.6084selected answer correct
$70	0.7791selected answer correct

Answer 1

Stock Price (S)	$60	$65	$70
Strike Price (E)	$65	$65	$65
Volatility = Standard Deviation (σ)	15%	15%	15%
Risk-Free Rate = T-Bill Rate (r)	3%	3%	3%
Term (t)	1	1	1
Formula for d1
= {[ln(S/E)] + [r+(σ^2/2)*t}/σ√t
So,
=(LN(C2/C3)+(C5+C4^2/2)*C6)/(C4*SQRT(C6))	-0.25862
=(LN(D2/D3)+(D5+D4^2/2)*D6)/(D4*SQRT(D6))		0.2750
=(LN(E2/E3)+(E5+E4^2/2)*E6)/(E4*SQRT(E6))			0.7691
Now, for N(d1)
=NORMSDIST(C11)	0.3980
=NORMSDIST(D12)		0.6083
=NORMSDIST(E13)			0.7791