Consider a European capped call option whose terminal payoff function is given by where X is the

Question:

Consider a European capped call option whose terminal payoff function is given by

CM (S, 0; X, M) = min(max(S - X, 0), M),

where X is the strike price and M is the cap. Show that the value of the European capped call is given by

where c(S,τ ; X + M) is the value of a European vanilla call with strike price X + M.

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Mathematical Models Of Financial Derivative

ISBN: 9783642447938

2nd Edition

Authors: Yue-Kuen Kwok

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Question Posted: Dec 02, 2023 04:04 AM

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Consider a European capped call option whose terminal payoff function is given by where X is the

Question:

CM (S, 0; X, M) = min(max(S - X, 0), M),

Step by Step Answer:

To show that the value of the European capped call is given by CMS X M cS X cS X M lets consider the two components of the equation 1 cS X This represents the value of a European vanilla call option w...View the full answer

Mathematical Models Of Financial Derivative

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