Message Font: Serif | Sans-Serif

No. of Recommendations: 1
I managed to put this infamous equation into Excel. I know that my version works. However, the answer I get is slightly different from the book I got it from, probably the built-in Excel function for Gaussian distribution is slightly off. I think I have successfully translated my spreadsheet to the below, but no guarantees.

cell A = underlying asset price
cell B = strike price
cell C = risk free interest rate
cell D = sqrt of asset price variance
cell E = time in years or fraction
cell F = LN(cell A/cell B)
cell G = (cell C + (0.5*cell D*cell D))*cell E
cell H = cell D*SQRT(cell E)
cell I = (cell F + cell G)/cell H
cell J = cell I - (cell D*SQRT(cell E))
cell K = hedge ratio = NORMSDIST(cell I)
cell L = NORMSDIST(cell J)
cost of call option = (cell A*NORMSDIST(cell I))-(cell B*cell L*EXP(-1*cell C*cell E))
cost of put option = ((1-NORMSDIST(cell J))*cell B*EXP(-cell C*cell E))-(cell A*(1-cell K))

math check: if this is correct,
asset=55, strike=52, interest=0.10, sqrt of variance=0.33, Time=0.4
correct answer: call=7.17, put 2.13

when I manually look up the NORMDIST, I get the correct answer. Using Excel’s built in function, I get slightly different numbers.

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.