Question: 30 points) Under the standard stock price model: dS(t) = rS(t)dt + S(t)d W (t), a. Derive the price of an option which pays 1

30 points) Under the standard stock price model: dS(t) = rS(t)dt + S(t)d W (t), a. Derive the price of an option which pays 1 TL at time T if S(T) K1 and pays 2 TL if S(T) > K2, where 0 < K1 < K2 are two given strike prices. b. Find the delta hedge for the option. c. Obtain numerical values for parts (a) and (b) when S(0) = 100, T = 1 year, r = 0.2, = 0.3, K1 = 130 and K2 = 160.

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