Risk Management and Financial Institutions, 4th Edition

DerivaGem Software

This software can be downloaded from the author's website: www-2.rotman.utoronto.ca/~hull/software.

GETTING STARTED

The most difficult part of using software is getting started. Here is a step-by-step guide to valuing an option using DerivaGem Version 2.01.

1. Open the Excel file DG201.xls
2. If you are using Office 2007, click on Options at the top of your screen (above the F column) and then click Enable this content. If you are not using Office 2007, make sure that your security for Macros is set at medium or low. (You can do this by clicking Tools, followed by Macros, followed by Security.)
3. Click on the Equity_FX_Index_Futures worksheet tab at the bottom of the page.
4. Choose Currency as the Underlying Type and Binomial American as the Option Type. Click on the Put button. Leave Imply Volatility unchecked.
5. You are now all set to value an American put option on a currency. There are seven inputs: exchange rate, volatility, risk-free rate (domestic), foreign risk-free rate, time to expiration (yrs), exercise price, and time steps. Input these in cells D6, D7, D8, D9, D19, D20, and D21 as 1.61, 12%, 8%, 9%, 1.0, 1.60, and 4, respectively.
6. Hit Enter on your keyboard and click on Calculate. You will see the price of the option in cell D25 as 0.07099 and the Greek letters in cells D26 to D30. The screen you should have produced is shown in the graphic following.
7. Click on Display Tree. You will see the binomial tree used to calculate the option.

NEXT STEPS

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