
376 Derivatives and Risk Management
First, calculate the risk-neutral probabilities p and (1 – p).
p =
e d
e
rT
−
=
−
=
0 06 90 365
0 97
0 4082
. ( / )
.
.
´
(1 – p) =
u e
e
rT
−
=
−
=
1 08
0 5918
0 06 90 365
.
.
. ( / )´
C
Tu
= Max [0, (S
Tu
– S
X
)] = Max [0, (1,200 × 1.08 – 1,240)] = Max [0, (1,296 – 1,240)] = INR 56
C
Td
= Max [0, (S
Td
– S
X
)] = Max [0, (1,200 × 0.97 – 1,240)] = Max [0, (1,164 – 1,240)] = INR 0
us, the expected value of the call at time 1:
Expected value at time 1 = 0.4082 × 56 + 0.5918 × 0 = INR 22.86
Discounting this expected terminal value at 6% over 90 days gives:
C
T–1
= C
T
e
–rT
= 22.86 × e
–0.06×(90/365)
= INR 22.52 ...