CNAM Using Black Scholes Model
From page 691 of an old university textbook, entitled Investments by Bodie, Kane, Marcus, Perrakis, Ryan Fifth Edition, it explains the Black Scholes formula outlined on page 690 in equation 18.1 Quote: "First look at equation 18.1 when both N(d) terms are close to 1, indicating a very high probability that the option will be exercised. Then the call option value is equal to So - Xe^-rT, which is what we called earlier the adjusted instrinsic value So - PV(X). This makes sense if exercise is certain, we have a claim on a stock with current value So and an obligation with present value PV(X)"
So = Current stock price
X = Exercise price
r = Risk free rate
T = Time to maturity of options in years
PV = Present value function
I am using the Black Scholes model assuming that exercise within 5 years is certain = So - PV(X)
You may be use another model to value options, but under my assumptions, the Black Scholes model shows a value of $0.27.
