Chicago investment firm is offering a new financial derivative called a windy put. The windy put is
Question:
Chicago investment firm is offering a new financial derivative called a “windy put”. The windy put is European and has a payoff at expiration equal to Max(0.75S T , 70-S T ), where S T is the price of the underlying stock on the expiration date.
a. Graph the payoff of the windy put on the expiration date as a function of the underlying stock on that date.
b. Decompose (break down) a windy put into a portfolio of underlying stocks and standard European put options on the underlying stock.
c. Using your answer to b. above, price a windy put by two methods: The Black Scholes Merton model and a three-step binomial tree. Use the following data:
- Underlying stock price is $50 today
- Time to expiration is 1 year
- Risk-free rate is 6%
- Standard deviation of the underlying stock return is 20%
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill