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European Option: Basic (No Dividend) Model

The document discusses a basic European option model with no dividends. It provides the stock price, exercise price, risk-free rate, volatility, and time to expiration to calculate the option price. It defines delta as the sensitivity of the option price to the underlying asset price and how delta indicates the hedge ratio. The document also includes calculations for converting shares to an option value using a conversion price and premium.

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jk kumar
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61 views

European Option: Basic (No Dividend) Model

The document discusses a basic European option model with no dividends. It provides the stock price, exercise price, risk-free rate, volatility, and time to expiration to calculate the option price. It defines delta as the sensitivity of the option price to the underlying asset price and how delta indicates the hedge ratio. The document also includes calculations for converting shares to an option value using a conversion price and premium.

Uploaded by

jk kumar
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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European Option: Basic (No Dividend) Model

S: underlying asset price 77.98


X: exercise price 97.48
Rf: risk-free rate 4.46%
s: annualized volatility 23.0%
t: years to expiration 5.00

Delta, also called the hedge ratio, measures the sensitivity of the price of an option to the price of its underlying asset. For example, a
call will rise $0.30 for each dollar increase in the price of the underlying asset. This price sensitivity also tells us how to create a hed
the option hedges. A delta of 0.5 for a call on common stock tells us that one call hedges 0.5 shares of stock. To hedge this position, a
held.

Current stock price $77.98

Conversion premium 25%


Conversion price $97.48
Conversion shares 10.26
Conversion option value $162.3

Face Value $1,000


Coupon Rate 1.97%
Discount Rate 5.75% 2.88%
Years to maturity 5.0
Period
1 9.84
2 9.84
3 9.84
4 9.84
5 9.84
6 9.84
7 9.84
8 9.84
9 9.84
10 1009.84
Bond Value ₹837.70
Required Value $837.7
Call Value $15.8
Call Delta (hedge ratio) 0.60

of its underlying asset. For example, a delta of 0.3 for a call option indicates that the price of the
sitivity also tells us how to create a hedged position by indicating how much of the underlying asset
hares of stock. To hedge this position, an investor would write two calls for each share of stock
Calculations

The basic Black-Scholes equation is Call Price = SN(d 1) – e–(Rf)(t)XN(d2),


where
S = current stock price d1 = ln(S/X) + (Rf + s2/2)t
X = strike price st1/2
Rf = risk-free rate
s: annualized volatility d2 = ln(S/X) + (Rf - s2/2)t = d1 – st1/2
t = years to maturity st1/2
N(·) = cumulative standard normal function

Cumulative Standard Normal Function: Basic (No Dividend) Model


d1 0.25687

N(d1) 0.60136

d2 -0.2574
N(d2) 0.39842
(t)
XN(d2),

= d1 – st1/2

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