The current price of F Ltd is 120and a European option with an exercise price of 115 will expire in 50 days. The annual continuously compounded risk…

(i) Hedge Ratio i.e. N(d1) Since d₁ is given, we shall calculate N(d₁) i.e. N (0.5375) and we shall use Interpolation method as follows: Cumulative Area under Normal Curve for N (0.54) 0.7054 Cumulative Area under Normal Curve for N (0.53) 0.7019 Cumulative Area under Normal Curve for N (0.01) 0.0035 Difference Variable 0.5375 – 0.53 0.0075 The additive value to 0.53 = 0.0035 × 0.0075 0.002625 0.01 Cumulative Area under Normal Curve for N (0.5375) 0.7045 Thus, Hedge ratio shall be approximately 0.70 or 70% (ii) Probability that price in spot market on expiration would be higher than exercise price of the Call is N(d2) d2 = d₁ - σ√t d2 = 0.5375 -0.30√50/365 d2 = 0.4264 N (0.4264) we shall use Interpolation method as follows: Cumulative Area under Normal Curve for N (0.43) 0.6664 Cumulative Area under Normal Curve for N (0.42) 0.6628 Cumulative Area under Normal Curve for N (0.01) 0.0036 Difference Variable 0.4264 – 0.42 0.0064 The additive value to 0.42 = 0.0036 × 0.0064 0.002304 0.01 Cumulative Area under Normal Curve for N (0.4264) 0.6651 Thus, the probability that price in spot market on expiration would be higher than the exercise of the call option shall be approximately 67%. (iii) Value of Call Option OP = SN(d₁)- Xe -rt N(d₂) = 120 x 0.7045 – 115 x 0.9891 x 0.6651 = 84.54 - 75.65 = 8.89 Value of Put Option Vp = - Vs + VC + PV(E) = -120 + 8.89 + 0.9891 x 115 = 2.63