Q37.3.4 - where do d1 and d2 values come from?

[cwright]

in the solution it says, "since d1=1.25786...." Where do the d1 and d2 values come from? are they calculated using the formulas for d1 (page 54 of notes) and d2, and if so, what is the likelihood that is testable?

 

[David Harper CFA FRM]

Hi cwright, it is the same d1 as in Black-Scholes, except per the notes the risk-free rate is replaced by the asset's expected growth of 10%. That is:

• Equity value = V*N(d1) - F*EXP(-rT)*N(d2), is similar but not identical to:
• call option = S*N(d1) - K*exp(-rT)*N(d2) of BSM

I think there is discussion of testability in here http://forum.bionicturtle.com/threads/merton-model-a-summary-of-the-issues.5646/