US $ PAK

Lending 5% 10%
Borrowing 7% 13%
Inflation 5% 12%
Spot Rate 1£ 105

Importing/Payable Exporting
Step 01: PV of Hedge amount Step 01:

PV= FV
Lending Rate Same (1+i)^n Borrowing Rate Same
Currency 768 Currency
1.024695076596
749.49
Step 02: Conversion of PV Step 02:

1= Same currency then

Multiply with spot rate FV= 78696.58

Step 03: FV of Converted Amount Step 03:

Borrowing Rate of Lending Rate of other

other Currency FV= PV*(1+i)n Currency
($83,655.61)
Step 04: Effective Exchange rate Step 04:

Devide with FV = ($83,655.61)

768
1$= ($108.93) lower Amount currrnecy
Step 04: Effective Exchange rate Step 04:

F(o,T)= S0(1+rf)T
(1+rff)T

F(o,T)= 107.5929830426
1.058300524426

F(o,T)= 101.67
 Lending 5% 10%
millions 768 $ Borrowing 7% 13%
T 0.5 Inflation 5% 12%

Exporting/Receivble
Step 01: PV of Hedge amount

PV= FV
Borrowing Rate Same (1+i)^n
Currency 768
1.06301458
722.47 ($83,655.61)
Step 02: Conversion of PV

FV= 6.88

Step 03: FV of Converted Amount

Lending Rate of other

Currency FV= PV*(1+i)n
($7.05)
Step 04: Effective Exchange rate

= ($7.05)
105
lower Amount currrnecy 1$= ($0.07)
Step 04: Effective Exchange rate

F(o,T)= S0(1+rf)T
(1+rff)T

F(o,T)= 107.592983043
1.05830052443

F(o,T)= 101.67
655.61)
 h x (h+m)
6x 12
6 x(6+6)

h
30 days g
60 days h-g
180 days m
360 days h+m-g
PRICING OF THE FORWARD VALUE

step 1 1.0595 step 1

step 2 1.0285

devide 1.030140982013
-1 0.030140982013
Answer 0.060281964025

PRICING OF THE FORWARD VALUE

($130.99)

Days Dividend PVIF PV(Dividend) Days Pass

50 0.75 0.9943799691449 0.745784976859 75
140 0.75 0.9843433878493 0.738257540887
1.484042517746
According to Formula
F(0,T) 62.4071377251274

INTERST FOR

S0= 1,146.92
T 365
i 6%

Days Pass Days Interst Due Days Remaining Interst Amount PVIF PV(Intesrt)
200 181 -19 40 1.003038
200 365 165 40 0.974003 38.960126077
200 547 347 40 0.946111 37.844440293
200 730 530 40 0.918871
76.804566369
According to Formula
F(0,T) 1134.32235964846

Curre

Spot rate S0 168

r 5.80%
rf 7.80%
T 0.0821917808219

F(0,T) 168 1.7913415051439

1.8108476874132

92.7742300844686
Answer 166.19032895808
 180
45
135
180
315
VALUE AT ANY TIME g

1 - 1.0301409820126
1.022125 1.0538125

0.978354 - 0.9775372583004

Answer 0.00081666123

VALUE AT ANY TIME t

4.94660380876019

DIVIDEND FORWARD

Days Dividend PVIF PV(Dividend)

140 0.75 0.99270012700994 0.7445250952575
 55.006 - 62.407137725127
1.0141894343644
- 61.392948290763

-6.386948290763

As we are on long position s0 we have a loss of 6.53 dollar on each stock

INTERST FORWARD

S0= 1,302.26
T 180
rf 4%

Days Pass Days Interst Due Days Remaining Interst Amount PVIF
380 181 -199 40
380 365 -15 40
380 547 167 40 0.9695180867
380 730 350 40 0.9371816463

According to Formula
150.88584924
Currency Forward

T 0.082192
t 0.027397
0.054795
158 166.19
1.86954658726588 1.85554455136585

84.5124700695837 89.5640042044096

Answer -5.05
which is a loss of $0.0443 to the long and a gain of $0.0443 to the short.
 BUY SELL

LONG SHORT
POSITION POSITION

NEG LOSS FOR LONG TERM

VALUE OF FRA AT EXPIRY POS+ GAIN FOR LONG TERM

STEP 1 0.0011
1.03125 POS+ LOSS FOR SHORT TERM
NEG GAIN FOR SHORT TERM
Answer 0.001067

0.0651

VALUE OF FRA AT EXPIRY

5 IF IT IS + THEN LONG TERM GAIN

SHORT TERM LOSS

As we are on SHORT position s0 we have a loss of 5 dollar on each stock

PV(Intesrt)

38.78072

38.78072

-164.5003
 286500
343600
371000
1001100
Buy 1 call option at low price and sell one call option at high price. (Bull 2. Buy 1 call option at low, 1 call op
Spread) (Butt
Ex Price Call Option Put Option Ex Price
Long Call 98 6 3 Long 98
108 4.5 3.5 Short 108
Short Call 118 4 5 Long 118

MPS LONG Call Short Call Net Position MPS

70 -6 4 -2 70
80 -6 4 -2 80
90 -6 4 -2 90
100 -4 4 0 100
110 6 4 10 110
120 16 2 18 120
130 26 -8 18 130
140 36 -18 18 140

5. Buy 2 call option and 1 put

4.Buy 1 call option and 1 put option when these are out of money. (Strangle)
Ex Price Call Option Put Option Ex Price
Long Put 98 6 3 Long Put 98
108 4.5 3.5 108
Long Call 118 4 5 118

MPS LONG Call Long Put Net Position MPS

70 -9 25 16 70
80 -9 15 6 80
90 -12 -3 -15 90
100 -4 -3 -7 100
110 -4 -3 -7 110
120 -2 -3 -5 120
130 8 -3 5 130
140 18 -3 15 140

8. Buy 1 put option at low price and se

7. Buy 1 call option at high price and sell 1 call option at low price. (Bear Spread)
Ex Price Call Option Put Option Ex Price
Long Put 50 8 6 Long Put 50
60 5.5 4 60
Long Call 70 4 3 Short put 70

MPS LONG Call Long Put Net Position MPS

30 -4 8 4 30
40 -4 8 4 40
50 -4 8 4 50
60 -4 -2 -6 60
70 -4 -12 -16 70
80 6 -22 -16 80
90 16 -32 -16 90
Buy 1 call option at low, 1 call option at high and sell 2 call options at middle. 3.Buy 1 call option and 1 put option at same exerc
(Butterfly spread)
Call Option Put Option Ex Price Call Option
6 3 Long 90 6
4.5 3.5 100 4.5
4 5 110 4

Short Put Short Call LONG Call Net Position MPS Long Call
25 4 -9 20 70 -6
15 4 -9 10 80 -6
5 4 -9 0 90 -6
3 4 -9 -2 100 4
3 4 -9 -2 110 14
3 2 15 20 120 24
3 -8 35 30 130 34
3 -18 55 40 140 44

5. Buy 2 call option and 1 put option at same exercise price. (Strip)
6.Buy 1 call option and 2 put option at same exer
Call Option Put Option Ex Price Call Option
6 3 Long Call 90 6
4.5 3.5 100 4.5
4 5 110 4

LONG Call-2 Long Put Net Position MPS LONG Call-2

-9 25 16 70 -6
-9 15 6 80 -6
-9 -3 -12 90 -6
7 -3 4 100 4
#VALUE! -3 #VALUE! 110 14
-240 -3 -243 120 24
#VALUE! -3 #VALUE! 130 34
-122 -3 -125 140 44

9. Buy 1 put option at high and sell 1 put option at low price
y 1 put option at low price and sell 1 put option at high price. (Spread)
Spread)
Call Option Put Option Ex Price Call Option Put Option
8 6 Short Put 50 8 6
5.5 4 60 5.5 4
4 3 Long Put 70 4 3

LONG Put Short Put Net Position MPS LONG Put Short Put
14 3 17 30 37 6
 4 3 7 40 27 6
-6 3 -3 50 17 6
-6 3 -3 60 7 -4
-6 3 -3 70 -3 -14
-6 -7 -13 80 -3 -24
-6 -17 -23 90 -3 -34
d 1 put option at same exercise price. (V-shape

Put Option
3
3.5
5

Long Put Net Position

17 11
7 1
-3 -9
-3 1
-3 11
-6 18
-3 31
-3 41

nd 2 put option at same exercise price. (Strap)

Put Option
3
3.5
5

Long Put-2 Net Position

34 28
14 8
-6 -12
-6 -2
-6 8
-6 18
-6 28
-6 38

sell 1 put option at low price. (Bear

pread)

Net Position
43
 33
23
3
-17
-27
-37
 Right to Buy (Call) Buy means Long call
Buy Sell Sell means Short call
Long Call Short call
Right to Sell Put
Buy Sell 100
Long Call Short call
80
Long call Minus Upper No formula Applied
Short Call Minus Lower Formula applied 60

40
MPS LONG Call Short Call Net Position
70 -9 4 -5 20
80 -9 4 -5
90 -9 4 -5 0
70 80 9
100 -9 4 -5
110 6 4 10 -20
120 16 -2 14
130 26 8 34
140 36 18 54
Should be Minus
Formula applied
 Ex Price Call Premimum Put Premium
Long call 98 6 3
108 4.5 3.5
Short Call 118 4 5 Long/Short Call
MPS 2-LONG Call Put Call Net Position
100 70 -12 25 13
Out of Money Strip Spread-12
80 15 3
80 At the Money 90 -12 -3 -15
100 -8 -3 -11
60 110 12 -3 9
In the Money 120 32 -3 29
40 130 52 -3 49
140 72 -3 69
20

0
70 80 90 100 110 120 130 140 150

-20
Long/Short Call

Prices
MPS)
 Boinomail Pricing Boinomail Pricing(1000 cal
S0= 50 S0=
up S+ 25% up S+
up S- 20% up S-
X 50 X
u 1.25 u
d 0.80 d
r 7.00% r

S+ S0(1+up) 62.5 S+
S- S0(1-up) 40 S-
C+ Max(0, S+-X) 12.5 C+
P+ Max(0,X-S+) 0 P+
C- Max(0, S ̄ - X) 0 C-
P- Max(0,X-S-) 10 P-

calculated by: π = 1+r−d 0.27 0.6 calculated by: π =

u−d 0.45

n= C+-C- 12.5 0.5555556 n=

S+-S- 22.5

Value of call option = C = π C+(1−π )C- 7.5 7.0093458 Value of call option = C =
1+r 1.07

10000 Call options:

Sell the call

π P+(1−π )P- Buy the umderline

1+r

H+=nS+C+

H-=nS-C-
We shall use the $217,500 value. If we invest 2780
$217,500, the return is:-
g=

The arbitrage will give 9.38% risk free which is bett

 10.11.12 Page # 195 to
mail Pricing(1000 call options) (Two period binomial model)
168 S0= 168
28% up S+ 28%
18% up S- 18%
100 X 100
0.28 u 0.28
0.18 d 0.18
5.00% r 5.00%

S0(1+up) 215.04 S+ S0(1+up) 215.04

S0(1-up) 137.76 S- S0(1-up) 137.76
Max(0, S+-X) 115.04 S++ S0(1+up)2 275.2512
Max(0,X-S+) 0 S-- S0(1-up)2 112.9632
Max(0, S ̄ - X) 37.76 S+- S0(1+up)(1-d) 38.7072
Max(0,X-S-) 0 S-+ S0(1+up)(1-d) 38.7072
C++ Max(0, S++-X) 175.2512
C+- Max(0, S+- - X) 0
1+r−d 0.87 8.7 C-+ Max(0, S-+ - X) 0
u−d 0.10 C-- Max(0, S-- - X) 12.9632

C+-C- 77.28 1 C+ 1524.685 1452.081

S+-S- 77.28 1.05

π C+(1−π )C- 710.096 676.2819 C- -99.81664 -95.06347

1+r 1.05 1.05

10000 C 13365.1 12728.66

1.05
80000
calculated by: π = 1+r−d
1680000 u−d
1600000
n= C+-C-
2150400 S+-S-
1150400
1000000 n += C++-C+-
S++-S--

1377600 n- = C-+-C--
377600 S-+-S--
 1000000

7,500 value. If we invest 278046 and e nd up with

-37.50%

e 9.38% risk free which is better to risk free of 8%.

 10.11.12
(Two period binomial model)
S0= 30
up S+ 14%
up S- 11%
X 30
u 1.14
d 0.89
r 3.00%

S+ S0(1+up)
S- S0(1-up)
S++ S0(1+up)2
S-- S0(1-up)2
S+- S0(1+up)(1-d)
S-+ S0(1+up)(1-d)
C++ Max(0, S++-X)
C+- Max(0, S+- - X)
C-+ Max(0, S-+ - X)
C-- Max(0, S-- - X)

C+ 5.226
1.03

C- 0.24528
1.03

C 2.9461
1.03

0.87 8.7 calculated by: π =

0.10

1547.145 20.01999 n=
77.28

175.2512 1.0798777 n +=
162.288

-12.9632 0.1745744 n- =
-74.256
ial model)

34.2
26.7
38.988
23.763
30.438
30.438
8.988
0.438
0.438
0

5.073786

0.238136

2.860291

1+r−d 0.14 0.56

u−d 0.25

P+-P- 4.83565 0.644753

S+-S- 7.5

P++-P+- 8.55 0.561576

S++-S-- 15.225

P-+-P-- 0.438 0.065618

S-+-S-- 6.675
 Example 26
Black Schole Model
S0= 52.75
X 50
volatility Sig 0.35
sig2 0.1225
Sig^2/2 0.06125
T 0.75
rc 4.88%

Call option value, C= S0 N(d1) – XerT N(d2) Put Value P = XerT

P=

(d1) 0.0535408 0.0825375

0.303108891324553

(d1) 0.45 0.6736

(d2) 0.15 0.5596

N(d1) From Ditribution table

N(d2) From Ditribution table

C= S0 N(d1) – XerT N(d2)

r is minus here

Putting Formula C= 8.5579541

 P = XerT-S0 +C

4.011038
 (Black-Scholes-Merton Model)

Dividend Dividened Yeild

PV= FVe-rt
So/ S0-PV(dividend) So/ So e-yd*t
So/ So e-rt

S0= 108 Consider an ABCD Stock that trades at Rs. 10X today. Call and put
X 100 with an exercise price of Rs. 100. The options expire in 275 days, a
PV(Dividend) 4.25 compounded risk-free rate is 3 percent.
Dividend Yeild 1.50% A. Calculate the value of European call and put options using the B
Sig 0.35 that the present value of cash flows on the underlying asset over t
sig2 0.1225 B. Calculate the value of European call and put options using the B
Sig^2/2 0.06125 that the continuously compounded dividend yield is 1.5 percent.
T 0.753425
rc 3.00%

So/ S0-PV(dividend)
So/ 103.75

Call option value, C= S0 N(d1) – XerT N(d2) Put Value

(d1) 0.036814 0.06875

0.303800132567359

(d1) 0.35 0.5557

(d2) 0.04 0.4013

N(d1) From Ditribution table

N(d2) From Ditribution table
C= S0 N(d1) – XerT N(d2)
r is minus here
Putting Formula C= 18.42075

Dividened Yeild
So/ So e-yd*t
So/ 106.79
Call option value, C= S0 N(d1) – XerT N(d2) Put Value

(d1) 0.06566 0.06875

0.303800132567359

(d1) 0.44 0.5871

(d2) 0.14 0.4325

N(d1) From Ditribution table

N(d2) From Ditribution table
C= S0 N(d1) – XerT N(d2)
r is minus here
Putting Formula C= 20.41085
Model)
17-19-20
6792 ateeeq

10X today. Call and put options on this asset are available
ons expire in 275 days, and the volatility is 0.35. The

d put options using the Black-Scholes-Merton model. Assume

e underlying asset over the life of the options is Rs. 4.25.
d put options using the Black-Scholes-Merton model. Assume
nd yield is 1.5 percent.

P = XerT-S0 +C

P= 12.43583
 P = XerT-S0 +C

P= 11.38961