DERIVATIVES . Qerivalive 15 4% Jnonciok snstryment whch obrives [ts vole Zroro 9a wandering. set - Underlying asseh Means Shares, debentwres, Bonds, Commodity , Cudnency , stock Todex etc. Berivabve #s q insteyment fod being. We will discuss dovvelbve in 3 pur PART I option Contrart PART T forwarq eontrark part wm Furuse contrat+ Option JS a Contract in which option holden has a aight buf not obdigation yy ov = re underd ing asset at predetermine price ie Excencise price ov Shike price . An option peermium da +o be poid in Advance by opton totden 4 Such premium Jo Frarsfered to ophon Waiter - 2 Thene ane two panies in opkon Contract ti Option Buyer ov option Holder i) Ophon Sellen ov Option wouter .Panties — Optio Byer onsen len » Righk but not obligation 1 obigation bub nat Right 2: Maxirour poopit > premium Amt Joss - andimited 1g. Maxirn urn Joss > Premiuin Pret Profit - sunleited 3 An option Prerium yh be - Mongin Money pe neuird 2 poid An Advance be deposited ot stock Exchanse 4. Loves Vode dy ue Hotes Voladildy.@ how ore two Sype of opbons — b Colt opsion —i« Right to buy en wind: * Expectation 2 price ise . By —_- i Dari, a: puk opfion —: x Right $0 elt on underlying, » Expectation > price fall .® Types of opfion on the basis of | | eee Amesticon option Su v 4 Con be Excencised he on ox before ianasty only BA Note: premium Amt of American opston i) ynove +han European | Opsion .5: Totainsic Value 4. Time Value Tn the money. AT The money. , out of He money IT AT™ oTm Call option cmp>EP cmpsEP cmp cep put option CMP EP + Totainsic value & Tine Valve Zotwingic yoloe * Col option = CmP-~ EP 2 ‘ pul option =. Epa cmp, o Time vole Time value = option premram— Intrinsic volug NoTE ~ Of option is rtm, then dikhownce befween cmp 4 EP is IV 4 9p Optio is ATM,04 orm tho ZV wil! be Zero.6: Expeted_Volue_ op option Expected Volue off ophion = & Intrinsic value &%- Galt option Gateutated of Experted Vals E+ 500 DP EP Excrdseo Tr a i = = So ole Peued 2 ven S20 S00 yes 20 03 j Price on Mot — Prob 530 500 Yes 30 02 S 520 03 $10 S00 yes 10 oj 1 530 On 490 S00 No ° 03 @ ae o Se No } } 490 oo | ee 7 4go o-} Expected values. of 13 Colcufated! Expecteol Catt. Value of cabl optionExpected Valve of option | Coleulakion of Expected Value of Put MP EP Excercise ovnot Inivicie prop Te & pat option bi E= ood 1?o0 200 = Yes 30 oy 12 Period = 3 Month 180 200 yes 20 of @ Price on Maturity Probability 200 200 No So as oO No on 220 200 No 0 02 0 ve o Expected Velue op 4 200 03 Put 220 ot Caleutate Expected Volue of pul.a a = lL) HEDGERS x) SPECDLATORS am ARBITRAGEVRS °°mene I I Meaning . Short Sein wy a Speculasive aciyy career dasignedl So” Cann profit. on She bs beosish price expectation . Eg Explanasion - a= Tn Short Selling sho g Seller bornows shock from stock fencer f Seb Gt ak Cunt Mon ket pice with a view do y bu it poten on ot dowen price & Retuan fo Btock gencln.3. Sounces_of Risk (Loss) -: + price appreceition & Stock denchin changes * Compenscabes Dividand Frnt + tender for Loss of DB br Sounces of Return: + price depreciation Tntt on Pint of shoot Selling 5: begat Status —: Short Selling is prohisited in Some Countries but Some Counkres Like vs # Trelia altow Shark Settings with Some vestrictions .9: option pricing _ 0 Valuation of opton Thene ane thnee Models to Colculate Volue of Option + Binomial Model “Risk Neudval Probability approoch “Delta Hed ings os Risk Free portfolio approach ° Replicating, Post folio approach 2. Put Call Pasidp Aheovam (PCP) 3- Black Scholes Model (s™)As the name Sug gested ' Ong too possible Prive of Stock on Motu: upper pri ppe aes of Stock (us) wae, fared Py oe dower price of stock (dS) on disquunt with RE Suppose Rate Current’ Monkel prie of stock (3) 50° Excensice price (call option) ~ Slo - Matusity, period + yea —- on Ma ity a et upper prite « 600 s dower price Yoo RF: loy Ra Value of option. SINO)MTaAL (curr) AED Ree + (90x07) + (Oxos) 57.27 EE__criow_to Coteulate Risk Newlral Probability, _ SR=(uSxp) +@Sx0-P)) SR:(usx Pp) + dS -CdSxP) sR-dS = USXP-ASKP sp-ds > P p. sR-as us-ds p(us-ds) « BRA) 2 (u-d) oo xtlo + Clooxt-20)xp + (looxo-g) Ci-P) Joo xHO + 100xs20xP + 100x OF -looxdaep (joox blo) - (looxo-2) = looxl2oxP looxoeap (tooxpr0) ~ -(looxe 8) = = P (too x)-20-Joox oe) p. (roxhie)=| (100 x0-8)_ (Qooxl-20 ) - Y- (foo x08 x0-2) P= loo (I-10 - 0-8) Joo (120-07)caleutadion of Value. of opbon £9 Current morket (Risk Newbal Probabitits Pippreach ) Price. 2500 Step L_Given ie price + 150 ve nied ee + 1 year ue ta — Risk Free Rape s lof Ra 00 d= ' option = Cal) option as + 0-80 | Price On Mathur: Step@ calculation O Rig Neutral bai | upper price. & 600 Pd, Meor | oes a | Lowen price» = Yoo id eect | Step 4 cotulahen op Value gtontin SHPIE Binornial Tree value» CuP+0-P)cd es; @ tasso R :(00x095)+ (025 x0) cd: 0 Se = 6 36]- TPTSe Step-T Given t €g-l Sz Z}o00 5 ! S= & looo uS+ 1300, 1.3 ' 1900 j Period» 6 Month ds +200. 2 0.9 000 option: cod option E+ Noo | aS + 300 ds + 9oo Rate+ |: 9/ Pa Cormpunded Seri Ann. 1 81 Gmpunde Annually, 3. e) Compundel Corin Colcudote — Volue Calf Option , sop 2 R+(Fx Yin) > 47. oF 204 Woe )"s os ga SHepL Risk Neutral Probobility. p: Bed 0392-09. o.syp rd 130-0°9 StepIL Binomial ree (608) oe (00) Cu: 200 By G ese Ok éds0 StepTT value of coll Co: ort cups lrpyed , = Goo x 03ud W(ox0-«52- 50392 7 66-97Step-T Given 9-2 $+ S00 5S: = S00 us 600_ , 1.20 Peniod » 3Mon+h Soo option + Put Option | > 222- + Ovo on Mahavi RB (12%. 0287 uS+ 600 Step. aT Risk Newkal Probability dS: Yoo Pp: ee + h02P?-080_ p.can ur 120 = 0-80 He > 12. Par Compude . a = StepIE Binomial tree nouedly ost &9) cus0 E+ 530 Pe® cde Bo Valu of Puck = ° Step Value of Put pur cupalPed . (Oxo-s72 )rllsoxouer’ R 10227 254-09Step 2 Given us = = 11905 2 Oo _ ds Sat 0:9524 Rz ert = @ (0-08 x 8/2) 2 eee 2 70202 & = 450 Cans ?P SIEP2 Risk Newhyod pitabity Ps Orb- of _ 10202 - 0.9524 8 ee ee U-y VIFOS ~ 0-952y = 02869 S#P3 Binomio) Tree @Lr@ Cy= 50 Tw ede 0 SET Volug of Cay Cos CUP + (4-P) cy ert (50 x 0.2843) + 0 020% 43.95 yrTwo Period Binomiol Modes Q@ €:110 Yeor 2 NodE- A Put option ad We (129-78) [Povo] Value of , (Buaxo-prGsr0d, _ “oe we opkon 06 of & & Pod 7257 = 1296 5 (6525) [Rios mis] 7-68 ee > ea [Raazsesn ely Calculation of Value oy oe NoDE ¢ WDE NODE B Prevent Values BY Present volue = » (ows (97709, BU (14-5207) #(S5-25 x03) : 225 LOG: Intrinsic value ' 2538 ‘hense Value of option 5 higher abut Inhingie values 35 too ie 2 Ruz Value ey Option > 35Too Period Binorniol Moded Jn two Ppeviod Binornial Model . we divide option Peviod into Periods + UBing backwond Calculation , we coleulate Velue ef optien Ry each pode. ° Specie) Cove iS veguived in American oplion . In Armevicon pon value ef option be presenr Velue of Gross Poy off or ° Leivinsie Value of option wiichevey is Higher No Cress Check iS veguived «= in Eurnpean opiienPELTA HEDGING a ED) a= 150 Be a = g00 4s: 780 COMBINATION OF EuaREL A OPrzms os > 480 O somarnarziy of depres periods 3rmhs giv, of co: a - St . s fF =: 630 bone ; { - =——— 2.06 apree > colt #80- yao waite L €al/ oprron 4 Bay O'S shore today, gop Penpect Hedge.@ Poy off (0) Prices i 6 Cal option Extenused « (150) err share * 390 (#80 %0'5) ive @ Price s 480 Co option Lapsed 2 0 Seu share (996 x06) = ave #Y¥o t Fy avo Present Value poyoly joar 2 PIV)S eon = OS % 600 - 23945 2 6S.9S ® Cost of option ~ 65.85 ae 2 (150%6°6)4/ox0-9) 2 290 Expected = 90 - 65-85 Tried > este eC 2 BOSH,3 Blak Scholes Code! ( 85m) As per BSM, Value of ophion ts calculated as undey A.Value of Call option CorSox A ) ~ Fe nade) So= Gavvenf Market farce 1 ld = delt of option nhl ‘ then? Probabi lity of Stock price Cove E = Exeveise pate Ke Rale of te ime of Int ds) © Probability of & xcevdise of ophion Tdi Bde is Calculated as under ( dredi- ole die ine att et\t | aegp uvvent Mavkel Price = 2% lor Exeaverse Price « ESO Risk Fvee vate of faa 67. 0a. Reviod = 2 years Standard deviation = (¢/, Pa. Calealate + Valye of call option + Vale of pal option Step 1 Given Sos Zes € sZlso He bf. & 2 Qyeays fz Igy, Step 2 Calculation of Ln g So ln 2 Ln Ls Iso Lnf-los 00553 step3 Caleulation sf di ade dhe Ln Sey (Arey eS (een 2 ols 2 = 0.0953 + (0.06 + ols 12. SF O:09S3 + ONN2S. 0. U2) = (tet 4) step -4 Calculation of chSteps Calealahion of 2 (dz) —_ Le Aen - jto ————= 0-3 09089 Lie —— 08849 rose — o-tis9 — _ of = oF Dots L 09s gs —— 0:3 2%9 or oto8 Ie 0-018 20108 ro.o2) Ady) 2e gous (SO 7 alae) « ovsisa (22 “218 9 0083) = 0:6%F = oeseSteps - Valye of c Hi : oplior Value of Pat Cos Ss a £ Sex a (Av xnlde) Using pak Gill pavhy = [6SXD-B68F “ie : aura” coe oth sce coer ao ee ae Tis 143.33 ax ogise loser = 344th +e 246 = (4538-1 O-Slee lost = bt S] Wate = ae ‘ Pos a-S| oo using. BSN @ ® 2 Ee palty asoxnkdy) -_ eee A te) 2 voeise ¢ (OIE xo-00e9) DOs (21S xo 14s X0-13K Vs = 0.882 —s Yo volt? Poe asastep3 co\culotion of adda Step T- Given $0: 280 , We a p27 dus (8) rE) 6 * 0-40 Ae : soy + waa) + Cora fee's ne iat = OMS Step I Calewation of LE) 2 O-06N6 + Ole » (2) aris s ©5820 Ly {-066%* 0-0 6U65 “a | 4. a 0-2992 epee 09-26 —— 0-5927 oF 0-602 O2TS ‘i ae | osga0 0°05 00194 082 + 0.55 - (1-0-2912) = @-7088 N(d2) = ossent (232 x0.0482) oT (1-012) + 0-7857 =: 0-676 alge o 0169 APE vole of coll option eo . : Coz Sound.) -E. yy 0-088 (292 xo 032) DE NG) = Fouo-F196 ~75_-X-O-6126 2 07196 “gloi2y os) 59-568 (ee #0 6176) ¥ 5?-568 us.g9 > [1382Qa Copertg an op proget 4 toss (0) prce of Share on Moluvty F500 Sn 2h's Situghon, my. x can nok Exconvie cou opten 4 pot optron, hence F Gross Payoff loss on ton shores €) Cort of strategy Bas as xloo > 2350 Loss as (2) prce @B shore = 350 In His situabon mr. will Excercise e's pt oprion 4 Com option Wilt lopse Grows Pay obh (YS -35) 2 sm {pion top shave © cost of staateyy. py “BL Susum: x ese &) price of show 2 S00 a Qn thet Sruekion , mr. % will Beceruie Ree cas ophin 4 Put ophim Ww! lopse spt on sm shore 50) = 50 gree Pay of (600 st)» Be Estaps 2150 ©) Cost of Strategy 2OPTION GREEKS nan halal ag ob option depends spon ppllowing foctom 1 Stock price (5) 2 Rxecercrse pre CE) 3 Time 4 Volatilit. (cr 5+ Rate of hn We Among ese factors, Excercise Price is constoot, nerpoing factors mop chooge . option pree Qi chonge fue cho un 19 fhese factors. pe wish CorMyout Sensitivity Analysis ie. Rofe of charge jo pre price with desperk 1 each faclor keeping offer factors conshoot. mx ‘Rote G chonge have berg 9sipned in Gneek Lofts. price|. Delta I Delta Means Rate of change 3 Sup in option price with vespect 4o Stock price. Since Call is bullish 4 Put is bearish hence Call has positive delta put has Negative delta. 2 Ok coll option is deep: Out of the tnoney then delta of call chser to Zeno. 9b COU Option is deeply . In the Money Then delta of Call closer te 2° pose, Delta Of CoM O4 4 Duta | pur o¢ Means: => If Means ib price + Stock ge YP by 21 then rice + Col) option will ge up by Yo pasa + Pris of ht Oplion “wil go down by Go paisa. =) In Binowiol 1 Con is eguivalen? to 0-4 shane long, V put is equivalent 4 06 Shere short = In 85M Delia> N(d,) = helye Ratio Delta of Call OY » Uarie DEA By OU Shane.2- Garnma ci Delta does not move ob Some ae Oi chonge in option pre Rote hence Rode of Change in with, yeapect do Volaslity is cate delta with respect to Rate of vega. chonge in Stock price is Calfed Price of Ophion void) go up Gamma. due to Gnerease in Volailigy, 3. ‘theta & Rho, i i change im opie: Rate of change in option price Rete o ve ip option with vespect ¢ Rote of change Price ith Tepect to Interat in Tune is Colled Theta. Rate is calted “fhe” Option price will go ova Sh Rote op Lnit zises ther : Price Coll Will go due “@ passage of time. iets 5 i Gia yu.