r= 2.

50%
X= 75
S(0) = 78
uS(0) = 93
dS(0) = 65

Binomial Option Pricing

Share Call option Loan with maturity value of 65
93 18 65

78 c 63.41

65 0 65

Therefore, we can replicate call option's payoff using share price and loan:
Share and loan Call option
28 18

14.59 c

0 0

The current call option price should be: 9.38

Or using hedging ratio:

�=(𝐶_𝑢−𝐶_𝑑)/(𝑢𝑆_0−𝑑𝑆_0 ) dS(0) dS(0)
Buy 0.64 share at price uS(0) 59.79 41.79
Write 1 call at price Cd - 18.00 -
H= 0.64 Total 41.79 41.79
The portfolio must have a current market value equal to the present value of 41.79:
0.64*78 - C = 41.79/1.025
C= 9.38
 S(0) = 110
C(0) = 14
P(0) = 5
X= 105
r= 5% per year
T= 1 year

A. Put-Call Parity
𝐶−�=𝑆−𝑋𝑒^(−𝑟𝑇)

LHS = Left
Hand 9
Side

RHS =
Right 10.12
Hand
Side

Karena nilai di kedua sisi tidak sama, maka terdapat peluang arbitrage.

B.
Berdasarkan perhitungan di a, arbitrage dapat dilaksanakan dengan cara
membeli portofolio yang lebih murah dan menjual portofolio yang lebih
mahal.
Jual: RHS
Beli: LHS
Atau dengan kata lain, strategi arbitrage yang dapat dilakukan adalah:
Jual Saham 110
Lending loans - 99.88
Beli call - 14
Jual put 5
Arbitrage profit 1.12
 T= 0.5 year
σ= 50%
X= 50
S(0) = 45
r= 0.03
δ= 0

A. Black-Scholes pricing formula for call option

𝐶_0=𝑆_0 𝑒^(−𝛿𝑇) 𝑁(𝑑_1 )−𝑋�^(−𝑟�) �(�_2 )

𝑑_1=(ln(𝑆_0∕ 〖𝑋 )+(𝑟−𝛿+𝜎^2/2) 〗 𝑇 )/(𝜎√𝑇)

𝑑_2=𝑑_1−�√�

d1 = -0.0788
d2 = -0.4324

N(d1) = 0.4686
N(d2) = 0.3327

C(0) = 4.70

B. Black-Scholes pricing formula for put option

�_0=��^(−��) [1−�(�_2 )]−𝑆_0 𝑒^(−𝛿𝑇) [1−𝑁(𝑑_1 )]

P(0) = 8.95
Left-Hand Side
C. Put-call parity relationship
𝐶−�=𝑆−𝑋𝑒^(−𝑟𝑇)
LHS = RHS. The put- - 4.26
call parity holds.
RHS = - 4.26
LHS = RHS. The put-call parity holds.

Right-Hand Side
t-Hand Side
 r= 3.00% every 3 months
X= 90
S(0) = 110
u= 1.25
d= 0.8

A. Call option pricing using binomial model

Share Call option
Month 0 Month 3 Month 6 Month 0 Month 3 Month 6
171.875 81.875

137.5 Cu

110 110 C(0) 20

88 Cd

70.4 0

Finding the value of Cu

Hedge ratio at this point: uuS(0) udS(0)
�=(𝐶_𝑢𝑢−𝐶_𝑢𝑑)/(𝑢𝑢𝑆_0−𝑢𝑑𝑆_0 ) Buy 1 share at price uS(0) 171.88 110.00
Write 1 call at price Cu - 81.88 - 20.00
H= 1.00 Total 90.00 90.00
The portfolio must have a current market value equal to the present value of 90:
137.5 - Cu = 90/1.03
Cu = 50.12

Finding the value of Cd

Hedge ratio at this point: udS(0) ddS(0)
�=(𝐶_𝑢𝑑−𝐶_𝑑𝑑)/(𝑢𝑑𝑆_0−𝑑𝑑𝑆_0 ) Buy 0.51 share at price uS(0) 55.56 35.56
Write 1 call at price Cd - 20.00 -
H= 0.51 Total 35.56 35.56
The portfolio must have a current market value equal to the present value of 35.56:
0.51*88 - Cd = 35.56/1.03
Cd = 9.92

Finding the value of C(0)

Hedge ratio at this point: uS(0) dS(0)
�=(𝐶_𝑢−𝐶_𝑑)/(𝑢𝑆_0−𝑑𝑆_0 ) Buy 0.81 share at price uS(0) 111.66 71.46
Write 1 call at price C(0) - 50.12 - 9.92
H= 0.81 Total 61.54 61.54
The portfolio must have a current market value equal to the present value of 61.54:
0.81*110 - C(0) = 61.54/1.03
C(0) = 29.58
 B. Put option pricing using binomial model
Share Put option
Month 0 Month 3 Month 6 Month 0 Month 3 Month 6
171.875 0

137.5 Pu

110 110 P(0) 0

88 Pd

70.4 19.6

Finding the value of Pu

Hedge ratio at this point:
�=(�_𝑢𝑢−�_𝑢𝑑)/(𝑢𝑢𝑆_0−𝑢𝑑𝑆_0 )

H= 0.00
Pu = 0
Put option is worthless at this point.

Finding the value of Pd

Hedge ratio at this point: udS(0) ddS(0)
�=(�_𝑢𝑑−�_𝑑𝑑)/(𝑢𝑑𝑆_0−𝑑𝑑𝑆_0 ) Sell 0.49 share at price uS(0) - 54.44 - 34.84
Write 1 put at price Pd - - 19.60
H= -0.49 Total - 54.44 - 54.44
The portfolio must have a current market value equal to the present value of -54.44:
-0.49*88 - Pd = -54.44/1.03
Pd = 9.30

Finding the value of P(0)

Hedge ratio at this point: uS(0) dS(0)
�=(�_𝑢−�_𝑑)/(𝑢𝑆_0−𝑑𝑆_0 ) Sell 0.19 share at price uS(0) - 25.84 - 16.54
Write 1 put at price C(0) - - 9.30
H= -0.19 Total - 25.84 - 25.84
The portfolio must have a current market value equal to the present value of -25.84:
-0.19*110 - P(0) = -25.84/1.03
P(0) = 4.42

C. Put-call parity relationship

𝐶−�=𝑆−𝑋𝑒^(−𝑟𝑇)
Right-Hand Side
LHS = 25.17
RHS = 25.17
LHS = RHS. The put-call parity holds.
Right-Hand Side

Left-Hand Side
 r= 3.00% every 3 months
X= 110
S(0) = 110
u= 1.25
d= 0.8

D. American put option pricing using binomial model

Share Put option
Month 0 Month 3 Month 6 Month 0 Month 3 Month 6
171.875 0

137.5 Pu

110 110 P(0) 0

88 Pd

70.4 39.6

Finding the value of Pu

Hedge ratio at this point:
�=(�_𝑢𝑢−�_𝑢𝑑)/(𝑢𝑢𝑆_0−𝑢𝑑𝑆_0 )

H= 0.00
Pu = 0
Put option is worthless at this point.

Finding the value of Pd

Hedge ratio at this point: udS(0) ddS(0)
�=(�_𝑢𝑑−�_𝑑𝑑)/(𝑢𝑑𝑆_0−𝑑𝑑𝑆_0 ) Sell 1 share at price uS(0) - 110.00 - 70.40
Write 1 put at price Pd - - 39.60
H= -1.00 Total - 110.00 - 110.00
The portfolio must have a current market value equal to the present value of -110.00:
-1*88 - Pd = -110/1.03
Pd = 18.80
This is the put value if not exercised.

If the put is exercised at this point, the value would be: 22

A rational investor would choose the maximum value that is 22 when the put is exercised.
Therefore, the appropriate value for Pd is: 22.00

Finding the value of P(0)

Hedge ratio at this point: uS(0) dS(0)
�=(�_𝑢−�_𝑑)/(𝑢𝑆_0−𝑑𝑆_0 ) Sell 0.44 share at price uS(0) - 61.11 - 39.11
Write 1 put at price C(0) - - 22.00
 H= -0.44 Total - 61.11 - 61.11
The portfolio must have a current market value equal to the present value of -61.11:
-0.44*110 - P(0) = -61.11/1.03
P(0) = 10.44

The value of the American put option is 10.44 and investor would exercise the option early.
 r= 3.00% every 3 months
X= 90
S(0) = 110
u= 1.25
d= 0.8
Div = 12.5

E. American call option pricing using binomial model

Share price (ex-dividend) Call option
Month 0 Month 3 Month 6 Month 0 Month 3 Month 6
143.75 53.75

125 Cu
87.5 0
110 C(0)
81.875 0
75.5 Cd

47.9 0

Finding the value of Cu

Hedge ratio at this point: udS(0) ddS(0)
�=(𝐶_𝑢𝑢−𝐶_𝑢𝑑)/(𝑢𝑢𝑆_0−𝑢𝑑𝑆_0 ) Buy 0.96 share at price uS(0) 137.36 83.61
Write 1 call at price Cd - 53.75 -
H= 0.96 Total 83.61 83.61

The portfolio must have a current market value equal to the present value of 83.61:
0.96*125 - Cu = 83.61/1.03
Cu = 38.27
This is the call value if not exercised.

If the call is exercised at this point, the value would be: 35

A rational investor would choose the maximum value that is 38.27 when the put is not exercised.
Therefore, the appropriate value for Cu is: 38.27

Finding the value of Cd

Hedge ratio at this point:
�=(𝐶_𝑢𝑑−𝐶_𝑑𝑑)/(𝑢𝑑𝑆_0−𝑑𝑑𝑆_0 )

H= 0.00
Cd = 0.00
Call option is worthless at this point.

Finding the value of C(0)

Hedge ratio at this point: uS(0) dS(0)
�=(𝐶_𝑢−𝐶_𝑑)/(𝑢𝑆_0−𝑑𝑆_0 ) Sell 0.77 share at price uS(0) 96.64 58.37
Write 1 put at price C(0) - 38.27 -
H= 0.77 Total 58.37 58.37
The portfolio must have a current market value equal to the present value of 58.37:
0.77*110 - C(0) = 58.37/1.03
C(0) = 28.37

The value of the American call option is 28.37 and investor would not exercise the option early.