Answers to Chapter Review and Self Test Problems

24.1 The PCP condition says that:

Filling in the relevant numbers and rearranging to solve for P, the put price, we get:

24.2 We will do this one the long way and then check our answer using an options calculator. We will calculate the value of a call option and then convert it to a put using PCP. We first need d1 and d2:

d1 = [ln(S/E) + (R + ct2/2) X t]/(a X Jt) = [ln(40/45) + (.04 + .82/2) X 1/«]/(.8 X J/4)

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VIII. Topics in Corporate Finance

24. Option Valuation

© The McGraw-Hill Companies, 2002

834 PART EIGHT Topics in Corporate Finance

Referring to Table 24.3, the values of N(d1) and N(d2) are .4721 and .3192, respectively. Notice that in both cases we average two values. Plugging all the numbers in:

C = S X N(d1) - E X e-Rt X N(d2) = $40 X .4721 - $45 X e- 04(1/4) X .3192 = $4.66

Converting to a put as in our previous question:

Using the options calculator at www.numa.com, we get $9.21, so our "by hand" approach was pretty accurate in this case.

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