Determination of Hedge Ratio for European Call and Put Option with Black- Scholes Model.

Abstract

One of the alternative investment that offered in the world market is derivative product. A derivative product, such as option, represents a financial instrument which value is based on certain asset value which is called underlying asset. Option is a contract between two parties (the holder and the seller) where the holder has the right to buy or sell the underlying asset by a certain date for a certain price. This paper will study European option calculated by using Black-Scholes model to obtain value of call and put option. One of the usefulness of Black-Scholes formula is as a mean to control the risk of portfolio. Generally, the technique to control the risk is called sensitivity of option value (Greeks). Greeks consist of delta, gamma, theta, vega, and rho. In this paper, we only examine delta hedging to obtain the portfolio that replicate option price.