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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

A share of Kaveri Textiles trades at Rs 100. A one-year European call with strike Rs 100 is valued using Black-Scholes with risk-free rate 6% p.a. (continuously compounded) and volatility 20%. Given N(d1) = 0.6554, N(d2) = 0.5793 and e^(-0.06) = 0.9418, what is the call value?

The call is worth about Rs 10.98. It equals spot times N(d1), Rs 65.54, minus the present value of the strike times N(d2), Rs 94.18 × 0.5793 = Rs 54.56. Forgetting to discount the exercise price would wrongly give Rs 7.61.

  1. ARs 10.98Correct
  2. BRs 7.61
  3. CRs 3.82
  4. DRs 65.54

Explanation

d1 = (0 + (0.06+0.02)×1)/0.2 = 0.4 and d2 = 0.2, consistent with the given N values. Call = 100×0.6554 − 100×0.9418×0.5793 = 65.54 − 54.56 = Rs 10.98. Rs 7.61 results from not discounting the strike (65.54 − 57.93).

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