Option Valuation

The value of a call option can be found as follows:

where
and

V
c
= Value of the call option
P
0
= Current Stock Price
k
RF
= risk-free rate of interest
t = time remaining to maturity (fraction of a year)
N
d1
= Cumulative area under the normal distribution curve to d
1

N
d2
= Cumulative area under the normal distribution curve to d
2

X = Strike (exercise) price of the option
= volatility (standard deviation) of exchange rate


The value for a put option, can then be found from the following put-call parity relationship.


N
e
X
-
N P
=
V
d
t k
d 0 c
2
RF
1

t
t ) .5 +
k
( +
X
P

=
d
2
RF
0
1
o
o
(

|
.
|

\
|
ln

t -
d
=
d 1 2
o
P
-
e
X
+
V
=
V 0
T k
c p
RF