#### scorpiomanoj

##### New Member

While I once again thank u and your team for enabling many aspirants including me to qualify the prestigious FRM examination, I request you to clarify the following which I encountered when I was brushing up Hull's OFD.

I would like to refer page 294 example 13.6 of Hulls OFD 7th edition, which calculates the price of call and put using BSM for a stock option expiring 6 months with volatility 20% p.a. The solution in the book shows that the volatility of 20% p.a. is directly plugged into the BSM formula..

1. Is the volatility given in the exercise a daily volatiltiy or a 6m volatility or a annual volatility?

2. In any case, should volatility be appropriately scaled to time ( in this case 6 m) before plugging into BSM formula? My understanding is that in BSM, Dr of d1, ie. sigma X sqrt (T) does the job of scaling and similarly the second part of the numerator (r + 0.5sigma^2)T does that for the variance (ie, sigma^2 X T). Is my understading correct?

3. If the question statement explicitly mentions volatiltiy as 6m volatility, should one discard the time scaling factor in the Nr and Dr. of d1, as plugging in would lead to scaling the volatility and variance twice? (provided my understanding in s.no.2 is correct).

Thanks in anticipation.

Manoj Kumar Halan.