BMD5302

Financial
Modeling
Lesson 8
Derivatives 1:
Pricing Structured Products 1
BMD5302
Financial
Modeling
Lesson 8c
Chapter 19

2
(19) The Black-
Scholes Model
1. Implementation of the Black-
Scholes formula
• In spreadsheet
• Through VBA
2. Implied Volatility
• In spreadsheet
• Through VBA

3
 The Black Scholes Formula
N(d1) is the area under the graph of
the Standard Normal Distribution
with x ≤ d1.
N(-) = 0, N() = 1, N(0) = 0.5,
N(-x) = 1-N(x).

In Excel, N(.) = “=normsdist(…)”

Xe-rT is the present value of X.

• Assumes a Normal Distribution for return.

• Worked for 1970s to 1987.
After 1987, Volatility Smile empirically proves that BS model is wrong.
Overestimate at the money options’ value, underestimate elsewhere.
• Stock return is not Normal Distributed: -ve skewness, fat tails.
4
 Implementing in a Spreadsheet
A B C
1 Black-Scholes Option-Pricing Formula
2 S 50 Current stock price
3 X 45 Exercise price
4 r 4.00% Risk-free rate of interest
5 T 0.75 Time to maturity of option (in years)
6 Sigma 30% Stock volatility, s
7
8 d1 0.6509 =(LN(B2/B3)+(B4+0.5*B6^2)*B5)/(B6*SQRT(B5))
9 d2 0.3911 =B8-SQRT(B5)*B6
10
11 N(d1) 0.7424 =NORMSDIST(B8)
12 N(d2) 0.6521 =NORMSDIST(B9)
13
14 Call price 8.64 =B2*B11-B3*EXP(-B4*B5)*B12
15 Put price 2.31 <-- call price - S + X*Exp(-r*T): by Put-Call parity
16 2.31 <-- - S*N(-d1) - X*exp(-r*T)*N(-d2) : direct formula
5
 Sensitivity Analysis
D E F G H I J K L M
Data table: Comparing
the Black-Scholes Data table header: = B14 Data table header:
18 to the intrinsic value =Max(B2-B3,0).
This is the option's
Stock Call Intrinsic
intrinsic value.
19 price price value
20 8.6434 5
21 5 0.0000 0 Black-Scholes Price Versus Instrinsic Value
22 10 0.0000 0
23 15 0.0000 0
24 20 0.0029 0 35
25 25 0.0484 0 Call
30 price
26 30 0.3101 0
Intrinsic
27 35 1.1077 0 value
25
28 40 2.7319 0
29 45 5.2777 0 20
30 50 8.6434 5
31 55 12.6307 10 15
32 60 17.0378 15
33 65 21.7056 20 10
34 70 26.5256 25
35 75 31.4304 30 5
36 80 36.3811 35
37 0
38 0 10 20 30 40 50 60 70 80
39 Stock price, S
40
6
 Using VBA
Function BSCall(Stock, Exercise, Time, Interest, Function dOne(Stock, Exercise, Time,
sigma) Interest, sigma)
BSCall = Stock *
dOne = (Log(Stock / Exercise) + Interest *
Application.NormSDist(dOne(Stock, _
_
Exercise, Time, Interest, sigma)) - _
Exercise * Exp(-Time * Interest) * _ Time) / (sigma * Sqr(Time)) _
Application.NormSDist(dTwo(Stock, Exercise, _ + 0.5 * sigma * Sqr(Time)
Time, Interest, sigma)) End Function
End Function
Function dTwo(Stock, Exercise, Time,
'Put pricing function uses put-call parity theorem Interest, sigma)
Function BSPut(Stock, Exercise, Time, Interest,
sigma)
dTwo = dOne(Stock, Exercise, Time,
Interest, _
BSPut = BSCall(Stock, Exercise, Time, Interest, _
sigma) + Exercise * Exp(-Interest * Time) - Stock sigma) - sigma * Sqr(Time)
End Function End Function
7
 Using VBA
A B C D E F G
1 BLACK-SCHOLES MODEL IN VBA
2 S 100 =B9
3 X 100 Stock price Call Put
4 =B8
T 1.00 20.3185 10.8022 <--This is the header of the Data Table
5 Interest 10.00% 40 0.1802 50.6639
6 Sigma 40.00% 45 0.4104 45.8941
7 50 0.8081 41.2918
8 Call price 20.3185 =BSCall(B2,B3,B4,B5,B6) 55 1.4241 36.9079
9 Put price 10.8022 =BSPut(B2,B3,B4,B5,B6) 60 2.3019 32.7857
10 65 3.4739 28.9576
11 70 4.9600 25.4437
12 To the right is a data 75 6.7683 22.2520
13 table that gives the 80 8.8965 19.3803
14
Call and Put Prices using Black-Scholes
call and put values for 85 11.3341 16.8179
15 various stock 90 14.0645 14.5482
16 50
prices. 95 17.0669 12.5506
17 45 100 20.3185 10.8022
18 40 105 23.7954 9.2791
19 110 27.4740 7.9578
35 Call
20 115 31.3316 6.8154
21 30 Put
120 35.3469 5.8306
22 25 125 39.5002 4.9839
23 20 130 43.7736 4.2574
24 15
25
10
26
27 5
28 0
29 40 50 60 70 80 90 100 110 120 130
30 Stock price, S
31

8
 • s of the Black Scholes
formula is the standard
deviation of the return of
the stock
Calculating • If given market Call price,
we can reverse-engineer to
the Implied find the s that gives that
Volatility market price. This is called
Implied Volatility.
• This is forward looking c.f.
the historical volatility is
backward looking.
9
 Implied Volatility
A B C

IMPLIED VOLATILITY FOR THE

1 AUGUST 2006 QQQQ OPTIONS
2 Current date 28-Jul-06
3 Option expiration date 18-Aug-06
4
5 S 37.11
6 X 37
7 T 0.06 =(B3-B2)/365
8 Interest 5.00%
9 Implied volatility, s 17.96%
10
11 Call price 0.7500 =BSCall(B5,B6,B7,B8,B9)
12 Put price 0.5337 =BSPut(B5,B6,B7,B8,B9)
13
14 Actual prices
15 Call 0.75
16 Put 0.55

10
 Implied Volatility using VBA
Function CallVolatility(Stock, Exercise, Time, Interest, Target)
High = 2: Low = 0
Do While (High - Low) > 0.0001
If BSCall(Stock, Exercise, Time, Interest, (High + Low) / 2) > Target Then
High = (High + Low) / 2
Else: Low = (High + Low) / 2
End If
Loop
CallVolatility = (High + Low) / 2
End Function
Function PutVolatility(Stock, Exercise, Time, Interest, Target)
High = 2: Low = 0
Do While (High - Low) > 0.0001
If BSPut(Stock, Exercise, Time, Interest, (High + Low) / 2) > Target Then
High = (High + Low) / 2
Else: Low = (High + Low) / 2
End If
Loop
PutVolatility = (High + Low) / 2
End Function

Benninga’s functions that find the implied volatility without the need for solver. 11
Implied Volatility using VBA
A B F G
1 BLACK-SCHOLES IMPLIED VOLATILITY
The VBA module attached to this spreadsheet defines a function called
CallVolatility(S,X,T,interest,target_call_price) . To use this function fill in the relevant rows (in boldface).
2 The cell labeled "Implied call volatility" contains the function.
3 S 51.00
4 X 50.00
5 T 1
6 Interest 8.00%
7 Target call price 6.00
8
9 Implied call volatility 15.35% =CallVolatility(B3,B4,B5,B6,B7)
10
11 Data Table: Implied volatility as a function of the call price
Implied
12 Call price volatility
13 15.35% =B9, table header
14 5.00 7.51%
15 5.50 11.96% Implied Call Volatility as Function of Call
16 6.00 15.35% Price
45%
17 6.50 18.45%
21.39% 40%
18 7.00
19 7.50 24.25% 35%

20 8.00 27.07% 30%

Volatility,s

21 8.50 29.84% 25%

22 9.00 32.59% 20%
23 9.50 35.33%
15%
24 10.00 38.05%
10%
25 10.50 40.77%
26 5%
27 0%
28 5 6 7 8 9 10 11
29
Call price
30
31

12
 Volatility Smile
A B C D E F G H I
1 Date 05/10/2022 X Call Imp Vol Put Imp Vol Volatility Smile is an empirical
2 Stock AAPL 120 26.2 55.09% 0.91 51.54% proof since 1987 that the Black
3 144.7153 125 21.8 52.85% 1.35 48.51%
4 Exp Date 04/11/2022 130 17.6 50.28% 2.04 45.98% Scholes Model is wrong.
5 T 0.08219178 134 14.35 47.49% 2.85 44.33%
6 rf 3.34% 135 13.6 47.03% 3 43.25%
7 sigma 40.00% 136 12.67 45.18% 3.25 42.81% If the BS Model is correct, then
8 137 12.1 45.78% 3.55 42.61% the graph should be a
9 138 11.4 45.33% 3.9 42.60%
10 139 10.65
Implied 44.44%
Volatility 4.17 41.92% horizontal line.
11 140 9.8 42.81% 4.5 41.51%
60%
12 141 9.2 42.67% 4.85 41.10%
13
55%
142 8.5 41.78% 5.15 40.25% Stock returns have –ve
14 50%
45%
143 7.9 41.38% 5.5 39.58% skewness and fat tails (Black
15 144 7.45 41.76% 5.95 39.38%
16 40% 145 6.85 41.09% 6.35 38.74% Swan events).
17 35% 146 6.2 39.97% 6.8 38.25%
18 30% 147 5.8 40.23% 7.34 38.17%
19 25% 148 5.3 39.75% 7.9 38.05% Enhancement: add “Jumps” to
20 20% 149 4.85 39.42% 8.3 36.80% the BS model.
21 115 125 135 150 145 4.4 38.94%
155 1658.8 35.99%
175
22 152.5 3.4 37.86% 10.35 35.11%
Call IV Put IV
23 155 2.48 36.27% 12 33.80%
24 157.5 1.86 35.76% 13.8 32.35%

https://www.nasdaq.com/market-activity/stocks/aapl/option-chain
13
BMD5302
Financial
Modeling
Lesson 8d
Pricing of Structure
Products
Chapter 19

14
 Payoff Long Call Payoff Short Call ST
0 Bends the right
X
side up or down

0 X ST

Payoff Long Put Payoff Short Put ST Bends the left side
0
up or down
X

0 X ST
Summary
Payoff Long Stock Payoff Short Stock S
0 T Changes the
X
overall gradient

0 X ST

Payoff Long Bond Payoff Short Bond S

0 T Lifts/Lowers the
X entire payoff by X

0 X ST Ch. 6: 15
 Structured Product 1: Principal Protection +
Participation in Upside
• Suppose
– Let S&P500 index be S0 now and ST 5 years later.
– Initial amount = $1,000, Participation Rate = 60%.
– No cash flows within 5 years
– Payoff in 5 years
• If ST <= S0 then only get $1000 back
• If ST > S0 then compute r = 60% * (ST / S0 – 1).
Get $1000 + $1000 * r
– Hence protection + participation in upside
16
 Structured Product 1: Principal
Protection + Participation in Upside
• Given S0 = 950
• When ST > S0, gradient of the up-slope
= 1000 * 0.6/950 = 0.631579

Payoff diagram
This looks like a
bond + a call
Gradient = 0.631579

17
 Structured Product 1: Principal Protection +
Participation in Upside
A B C
2 Initial S&P 500 price, S0 950 <-- The price of the S&P 500 at PPUP issuance
3 Structured exercise price, X 950
4 Risk-free interest rate for 5 years, r 5.00%
5 Time to maturity, T 5
6 Volatility of S&P 500, sSP 25%
7 Participation rate 60% <-- Percentage of increase in the S&P going to PPUP owner
8
9 Strutured components, value today
10 Bond paying $1000 at maturity 778.80 =EXP(-B4*B5)*1000
11 Participation rate /S0*at-the-money call on S&P 500 195.02 =1000*B7/B2*BSCall(B2,B3,B5,B4,B6)
12 Value of structured security today 973.82 =SUM(B10:B11)

18
 Structured Product 1: Principal
Protection + Participation in Upside
CFT
X Units CF0 ST ≤ 950 ST > 950
Bond 1000 1 -1000e-rT 1000 1000
Call 950 0.6316 -0.6316*C 0 0.6316*(ST – 950)
Total -1000e-rT-0.6316*C 1000 1000*(1+r)

• Price of structured product = 1000e-rT+0.5263*C

• rf = 5%, T = 5 years,  = 25%, S0 950 Call 308.79
X 950 Put 98.648
X = 950, C = 308.787354 T 5
• Bond price = 1000e-rT = 778.80 r 5.00%
sig 25.00%
• Hence price = 778.80 + 0.6316 d1 0.72672
* 308.787354 = 973.82 d2 0.16771
19
 Structured Product 1: Principal
Protection + Participation in Upside
• Note the gradient, which is the number of call, is
1000 * participation rate / S0
= 1.052632 * participation rate
• Hence price = 778.80 + 1.05263 * 308.787354 *
participation rate
• To have a price = 1000,
the participation rate = 68.05%

20
Structured Product 2:
ABN-AMRO Airbag
Structured Product 2:
ABN-AMRO Airbag

23
 Structured Product 2:
ABN-AMRO Airbag
X1 X2

• S0 = Index0, ST = IndexT.
• Let X2 = AirbagStart, X1 = AirbagStop
• Note: X2 = S0 and X1 = 75% * X2
• Suppose bought 10 certs. Entitlement = €1000
• Payoff:
ST <= X1 X1 < ST <= X2 ST > X 2
Payoff €1000/X1*ST €1000 €1000*ST /S0

• Equals a -ve put, bond, call 24

 The Story of the “Airbag”
0.3
=
0/X 2
100
=
ient
r ad
g
(X1,1000) (X2,1000)
Today S0. Set X2=S0 to
protect against price drop.
4 X1 X2
0. Create airbag X1=75% * X2
= (i.e.  = 75%) to form a
0/X 1
“cushion”. If price drop,
0 Airbag
10 payoff still = $1000. Smaller
nt=  bigger cushion. E.g. if  =
adie 0%, then X1 = 0; if  = 100%
gr then X1 = X2 no protection.
Note that payoff intersects
(0,0).

25
 Structured Product 2:
ABN-AMRO Airbag
• Payoff Formulas:
– Given S0 = 3,302.98
– X2 = 3,302.98, X1 = 2,477.23,
ST <= X1 X1 < ST <= X2 ST > X 2
Payoff 0.4*€ST €1000 0.3*€ST

– Portfolio:
• Short 0.4 put at X1 = 2,477.23
• Long 0.3 call at X2 = 3,302.98
• Long bond at X = 1000
26
 Structured Product 2:
ABN-AMRO Airbag
• Payoff Formulas:
– Given S0 = 3,302.98
– Set X2 = S0 = 3,302.98, X1 = 0.75 × X2 = 2,477.23
CFT
X Units CF0 ST ≤ X1 X1 < ST ≤ X2 ST > X2
Bond 1000 1 -1000e-rT 1000 1000 1000
Put X1 -1000/X1 1000/X1*P -1000/X1(X1-ST) 0 0
Call X2 1000/X2 -1000/X2*C 0 0 1000/X2* (ST – X2)
Total 1000/X1 * ST 1000 1000/X2 * ST

27
 Structured Product 2:
ABN-AMRO Airbag
A B C
PRICING THE ABN-AIRBAG
1 Find the Implied Volatility
2 Initial Stoxx50 price, S0 3,302.98
3 X1 2,477.23
4 X2 3,302.98 =B2
5 Entitlement, E 1,000.0
6 Risk-free interest rate for 5 years, r 7.00%
7 Time to maturity, T 4
8 Volatility of the Stoxx50, sigma 15.75%
9
10 Airbag components, value today
11 Number of puts to short 0.40 =B5/B3
12 Number of calls to long 0.30 =B5/B2
13 Bond paying X1 at maturity 755.78 =EXP(-B6*B7)*B5
14 E/X1 * written puts with exercise X1 -4.45 =-B11*BSPut(B2,B3,B7,B6,B8)
15 Purchased call with exercise X 2 272.09 =B12*BSCall(B2,B4,B7,B6,B8)
16 Value of structured security today 1023.42 =SUM(B13:B15)

Value of the Airbag is €1023.42. Hence it is a good buy at €1000. 28

 Structured Product 2:
ABN-AMRO Airbag
• Payoff Formulas:
– Given S0 = 3,302.98, r = 7%, T = 4,  = 15.75%
– X1 = 2,477.23, X2 = 3,302.98
– P = 11.017, C = 898.65,
Bond = 1000e-rT = 755.7837
– Price = 755.7837 - 1000/2477.23 × 11.017
+ 1000/3302.98 × 898.65 S0 3302.98 Call 898.65
= 1023.42 X 3302.98 Put 92.007
T 4
r 7.00%
sig 15.75%
d1 1.04639
d2 0.73139
29
 Structured Product 2:
ABN-AMRO Airbag
A B C
18 Table: Sensitivity of Airbag to Sigma
19 1,023.42 <-- =B16, data table header
20 0% 1,000.00
21 1% 1,000.00
22 3% 1,000.00 Airbag Pricing: Sensitivity to s
23 6% 1,000.35 1050
24 9% 1,003.98
25 10% 1,006.22 1040
26 11% 1,008.84
27 12% 1,011.75 1030
28
Airbag initial price

13% 1,014.81
29 14% 1,017.96 1020
30 15% 1,021.09
31 16% 1,024.17 1010
32 17% 1,027.14
33 18% 1,029.99 1000
34 19% 1,032.68
35 20% 1,035.21 990
36 21% 1,037.59 0% 5% 10% 15% 20% 25%
37 22% 1,039.80
38 Stoxx50 volatility, s
23% 1,041.84
39 24% 1,043.74
40 25% 1,045.48 30
 Structured Product 2:
ABN-AMRO Airbag
A B C D E F G H
42 Time to maturity, T
43 1023.42 4 3 2 1 0.5 0.0001
Data table
44 5% 1000.07 1000.20 1000.59 1001.77 1002.95 1000.20
header:
45 =B14 10% 1006.22 1008.40 1011.13 1013.78 1013.85 1000.40
46 16% 1023.41 1027.18 1030.82 1032.02 1028.51 1000.62
47 20% 1035.21 1039.61 1043.69 1044.54 1039.27 1000.79
48 Volatility of the Stoxx50, sigma --> 25% 1045.48 1050.45 1055.14 1056.54 1050.69 1000.99
49 30% 1052.22 1057.69 1063.09 1065.58 1060.25 1001.19
50 35% 1056.29 1062.26 1068.39 1072.20 1067.94 1001.39
51 40% 1058.44 1064.88 1071.75 1076.95 1074.00 1001.59
52 45% 1059.19 1066.10 1073.70 1080.28 1078.74 1001.79
53 50% 1058.94 1066.29 1074.59 1082.53 1082.39 1001.99

• Value of Airbag increases with increasing volatility of STOXX50

• Value of Airbag first increases with decreasing time to
maturity due to greater chances of positive payoff,
but then decreases when maturity is too short because the
time value of gain is reduced.
31
Structure Product 3: UBS “Goal”
34
35
 Structure Product 3: UBS “Goal”
• Pays $0.04 per quarter. Maturity in 1.5 years, pays par
$1.00*(1+worse return).
• Affected by 4 stocks: BHP, WBC, CBA, RIO. Based on their
stock prices at t = 0.
• Kick-in price = 70% of each price at t = 0.
Kick-in checked at each coupon payment date.
Kick-in occurred if one of the stock has price < Kick-in price.
• At t = T, if Kick-in has not occurred, then receive $1.00.
• At t = T, if Kick-in has occurred then receive
– $1.00 * [1 + Min(0, worst return among all the stocks at t = T)]

36
 Structure Product 3: UBS “Goal”
A B C D E F G H I
1 Date BHP.AX WBC.AX CBA.AX RIO.AX Date Cash flow:CBA.AX
2 Starting Price 43.59 27.84 56.29 78.4 =E395 31-Mar-10 -1.00 Issue Date
3 Kick-in Price 30.513 19.488 39.403 54.88 =E2*0.7 30-Jun-10 0.04 =0.04
4 Min Price 33.95 18.73 42.93 60.2 =MIN(E15:E395) 30-Sep-10 0.04 =0.04
5 Last Price 35.02 20.34 45.55 61.8 =E15 31-Dec-10 0.04 =0.04
6 Loss -19.66% -26.94% -19.08% -21.17% =E5/E2-1 31-Mar-11 0.04 =0.04
7 Final Value 0.803395 0.730603 0.809202 0.788265 =1/E2*E5 30-Jun-11 0.04 =0.04
8 30-Sep-11 0.77 =1/C2*C15+0.04
9 PV of Goals 0.92 =XNPV(0.0439,H2:H8,G2:G8)+1
10 IRR of Goals -2.189% =XIRR(H2:H8,G2:G8)

• On hind-sight, it
was worth $0.92,
or a return of
-2.189%

37
 Structure Product 3: UBS “Goal”
• Too complex for our pricing
• Reduced to the following
– Only 1 stock: Commonwealth Bank of Australia
(CBA), S0 = 56.29
– Kick-in Price = 100% of
starting price of CBA,
i.e. at t = T, always get
min(ST/S0, 1)
– Gradient = 1/S0 = 1/56.29
= 0.017765 38
 Structure Product 3: UBS “Goal”
• Cash flows:
– Priced at $1 on 31/3/10
– CBA stock price @ 31/3/10
S0 = $56.29
– Receives $0.04 on 30/6/10,
30/9/10, 31/12/10, 31/3/11,
30/6/11, and 30/9/11
– On 30/9/11 also receives:
• If CBA stock >= $56.29, then $1
• If CBA stock < $56.29, then 1/56.29 * ST = 0.017765 shares of CBA
stock * ST
• Like 0.017765 short put X = $56.29 + bond
– R = 4.39% annually (continuously compounded)
39
 Structure Product 3: UBS “Goal”
• Price this as a bond with 6 payments of $0.04
subsidized by 0.017765 units of short put.
– Put: Given S0 = 56.29, r = 4.39%, T = 1.5,  = 20.56%, X =
56.29
– P = 3.851
– Bond = PV(rate = 0.0439/4, N = 6, PMT = 0.04,S0 FV = 1) Call
56.29 = 7.4383
1.167652 X 56.29 Put 3.851
T 1.5
– Price = 1.167652 – 0.017765 * 3.851 r 4.39%
= 1.167652 – 0.06841302 sig 20.56%
= $1.099 d1 0.38741
d2 0.13561
• Is Goals a good “buy” at $1.00? Yes.
40
 Structure Product 3: UBS “Goal” A B C D
1 EQUIVALENCE OF 2 WAYS OF WRITING THE PAYOFF
2 CBA price, 30 Sep 2011, ST 45.55
3 CBA price, 31 Mar 2010, S0 56.29
4 Payoff ratio 0.017765 =1/B3
6 Terminal payoff
7 As described by UBS 0.81 =IF(B2>B3,1,B2*B4)
8 In option terms:
9 bond 1.00
10 short put 0.19 =B4*MAX(B3-B2,0)
11 Total 0.81 =B9-B10
13 Data table: Comparing the payoff on CBA-linked GOALS
Alternative
Cisco stock price UBS option
14 on 23 July 2002, ST description description
15 0.81 0.81 <-- B7 and B11 respectively
16 0 0.00 0.00 {=TABLE(,B2)}
17 10 0.18 0.18
18 20 0.36 0.36
19 30 0.53 0.53
20 40 0.71 0.71
21 50 0.89 0.89
22 56.29 1.00 1.00
23 60 1.00 1.00
• Portfolio: 24 70 1.00 1.00

– Short 0.017765 put with X = $56.29

– Long bond with X = $1 41
 Structure Product 3: UBS “Goal”
A B C
1 PRICING THE UBS GOALS IMPLICIT PUT
2 Annual risk-free rate 4.39%
3 Coupon rate 16.00%
4 Par Value 1
Conversion ratio: # of shares of CBA
5 received if share price is low 0.017765 =1/B21
7 Valuing the fixed payments at 4.39%
8 Fixed payments
9 Date Cash flow:CBA.AX
10 31-Mar-10 0.00 Issue Date
11 30-Jun-10 0.04 =$B$4*($B$3/4)
12 30-Sep-10 0.04 =$B$4*($B$3/4)
13 31-Dec-10 0.04 =$B$4*($B$3/4)
14 31-Mar-11 0.04 =$B$4*($B$3/4)
15 30-Jun-11 0.04 =$B$4*($B$3/4)
16 30-Sep-11 1.04
17 PV of Goals bond component 1.17 =XNPV(B2,B10:B16,A10:A16)
19 Valuing the puts with Black-Scholes
20 S 56.29 Current stock price
21 X 56.29 Exercise price
22 r 4.39% Risk-free interest rate
23 T 1.5 Time to maturity of option (in years)
24 Sigma 20.56% Stock volatility
25 Put price 3.851248 =BSPut(B20,B21,B23,B22,B24)
26 Value of puts embedded in Goals 0.068418 =B25*B5
27
29 Value of Portfolio (long bond + short put) 1.10 =B17-B26
31 Is the Goals a good buy? Yes =IF(B29>1,"Yes","No")

• In this simplified model, the Goals is a good buy. 42