THE PROBLEM CONCERNS THE VALUATION OF THE OPTION TO HEDGE THE EXCHANGE

RATE RISK RESULTING FROM THE CURRENCY POSITIONS OF THE "PROTECT" COMPANY IN
CONNECTION WITH COMMERCIAL TRANSACTIONS.

The company "Protekt" wants to purchase a European put option on a currency in-order-to
hedge its currency positions resulting from commercial transactions. The exercise price
(strike price) of the option is equal to 0.6. The current exchange rate is 0.65 and the exchange
rate volatility is 10%. The risk-free rate in our economy is 5% and the risk-free rate abroad is
8%. Time until option expiration is equal to T=0.5
▪ Present the formulas needed to calculate the value of this option and characterize the
individual components in these formulas.
▪ Draw the option's payoff function and explain how the value of the option will change
once as the exercise price increases and then as the exercise price decreases.
▪ Calculate the values of N(d1), N(d2) and define their names and explain their meaning
using illustrations and drawings.
▪ Calculate the value of the option.
▪ How much will the option value change (increase or decrease) if the standard
deviation of stock price returns increases to 30%.

THE CASE CONCERNS THE VALUATION OF THE OPTION,

TO HEDGE THE RISK OF CHANGES IN STOCK PRICES.

The "Grosz" company purchases an option to hedge the risk of changes in share prices in its
portfolio. The exercise price of the option is 110. The current stock price is 105 and the
volatility of the stock price is 20%. The risk-free rate is 5%. Time until option expiration
equals to T=0.5
▪ Present the formulas needed to calculate the value of this option and characterize the
individual components in these formulas.
▪ Draw the option's payoff function and explain how the value of the option will change
once as the exercise price increases and then as the exercise price decreases.
▪ Calculate the values of N(d1), N(d2) and define their names and explain their meaning
using illustrations and drawings.
▪ Calculate the value of the option.
▪ How much will the option value change (increase or decrease) if the standard
deviation of stock price returns increases to 60%.

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FORMULAS OF DIFFERENT TYPE OF OPTION

𝒄 = 𝑺𝒆−𝒓𝒇𝑻 𝑵(𝒅𝟏 ) − 𝑲𝒆−𝒓𝑻 𝑵(𝒅𝟐 )

𝒑 = −𝑺𝒆−𝒓𝒇𝑻 𝑵(−𝒅𝟏 ) + 𝑲𝒆−𝒓𝑻 𝑵(−𝒅𝟐 )

𝑺 𝝈𝟐
𝒍𝒏 + (𝒓 − 𝒓𝒇 + ) 𝑻
𝑲 𝟐
𝒅𝟏 =
𝝈√𝑻
𝑺 𝝈𝟐
𝒍𝒏 + (𝒓 − 𝒓𝒇 − ) 𝑻
𝑲 𝟐
𝒅𝟐 =
𝝈√𝑻

𝒄 = 𝑺𝑵(𝒅𝟏 ) − 𝑲𝒆−𝒓𝑻 𝑵(𝒅𝟐 )

𝒑 = −𝑺𝑵(−𝒅𝟏 ) + 𝑲𝒆−𝒓𝑻 𝑵(−𝒅𝟐 )

𝑺 𝝈𝟐
𝒍𝒏 + (𝒓 + ) 𝑻
𝑲 𝟐
𝒅𝟏 =
𝝈√𝑻
𝑺 𝝈𝟐
𝒍𝒏 + (𝒓 − ) 𝑻
𝑲 𝟐
𝒅𝟐 =
𝝈√𝑻

𝒄 = 𝑺𝒆−𝒓𝒅𝑻 𝑵(𝒅𝟏 ) − 𝑲𝒆−𝒓𝑻 𝑵(𝒅𝟐 )

𝒑 = −𝑺𝒆−𝒓𝒅𝑻 𝑵(−𝒅𝟏 ) + 𝑲𝒆−𝒓𝑻 𝑵(−𝒅𝟐 )

𝑺 𝝈𝟐
𝒍𝒏 + (𝒓 − 𝒓𝒅 + ) 𝑻
𝑲 𝟐
𝒅𝟏 =
𝝈√𝑻
𝑺 𝝈𝟐
𝒍𝒏 + (𝒓 − 𝒓𝒅 − ) 𝑻
𝑲 𝟐
𝒅𝟐 =
𝝈√𝑻

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