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Replicating Put Option

 

  • The Pay-offs from a put option can be replicated by selling delta share and setting aside a sum of money in a risk-free investment
  • In our example, the delta for the put option is given by:

 

  • The amount to be placed in risk-free investment is PV(48.57). Calculated as shown below:
  • The put can be replicated as shown below:

 

 

Scenario 1

Scenario 2

Stock Price

63.75

113.33

Option Value

21.25

0

Value of ∆Stock

27.32

48.57

Payoff from Option

21.25

0

Portfolio Value

48.57

48.57

 

  • The value of put therefore is:
  • Value of put = -0.4286 shares + PV( Rs. 48.57) (safe loan)
                 = - (0.4286 * 85) + 47.62= Rs. 11.19

 





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