The payoff of a derivative contract maturing in one year is given by where S(1) is the

Question:

The payoff of a derivative contract maturing in one year is given by

3S(1) 40, if 0 S(1) < 10, Payoff = 4S (1) - 50, if 10 S(1) < 20, S(1)+10, if S(1) 20,

where S(1) is the one-year price of the underlying nondividend-paying stock. You are given:

(i) The continuously compounded risk-free interest rate is 5%.

(ii) The current stock price is 15.

(iii) The price of a 10-strike 1-year call option is 5.52.

(iv) The price of a 20-strike 1-year call option is 0.38.

Calculate the fair price of the above derivative.

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Derivative Pricing

ISBN: 9780367734213

1st Edition

Authors: Ambrose Lo

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Question Posted: Nov 22, 2023 08:11 AM

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The payoff of a derivative contract maturing in one year is given by where S(1) is the

Question:

3S(1) 40, if 0 ≤ S(1) < 10, -50, if 10 ≤ S(1) < 20, if S(1) ≥ 20, Payoff=45(1) S(1)+10,

Step by Step Answer:

To calculate the fair price of the derivative we need to find the expected value of its payof...View the full answer

Derivative Pricing

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