Assume the price St of ZM at time t satisfies the log-normal model with volatility 16% and expected rate of return 10%. The spot price is $40. The risk-free rate is 5%. Portfolio Y has the following payoff in 2 years: the payoff is $50 if the price of IBM in 2 years is less than $30 and, the payoff is $25 if the price of IBM is 2 years is more than $30. Compute today's price of Portfolio Y.  

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To compute todays price of Portfolio Y we need to calculate the expected payoff of Portfolio Y in 2 ... View the full answer