A European-style exotic derivative written on a non-dividend paying stock has a terminal payoff depicted by...

  

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A European-style exotic derivative written on a non-dividend paying stock has a terminal payoff depicted by the thick line in the following diagram: Payoff 10 9 8 6 5 4 3 1 2 3 5 6 7 8 9 10 ST (a) (2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and put options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (b) (2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and call options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (c) (4 marks) Write down the terminal payoff structure of this exotic derivative using either your construction in part (a) or (b) by filling in the table below. Positions Component 1 COM CO. ... Net cash flow. ST<2 *** Payoff at maturity T 2 ST <5 5≤ ST <6 6 ST THE www COP *** www ... *** (d) (2 marks) If the cost for setting up this exotic derivative option is $5. What is the minimum terminal share price for the above exotic derivative to be profitable? (e) (2 marks) What are investors' predictions on the market movement if they wish to buy this exotic derivative? Limit your discussion to no more than 3 sentences. A European-style exotic derivative written on a non-dividend paying stock has a terminal payoff depicted by the thick line in the following diagram: Payoff 10 9 8 6 5 4 3 1 2 3 5 6 7 8 9 10 ST (a) (2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and put options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (b) (2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and call options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (c) (4 marks) Write down the terminal payoff structure of this exotic derivative using either your construction in part (a) or (b) by filling in the table below. Positions Component 1 COM CO. ... Net cash flow. ST<2 *** Payoff at maturity T 2 ST <5 5≤ ST <6 6 ST THE www COP *** www ... *** (d) (2 marks) If the cost for setting up this exotic derivative option is $5. What is the minimum terminal share price for the above exotic derivative to be profitable? (e) (2 marks) What are investors' predictions on the market movement if they wish to buy this exotic derivative? Limit your discussion to no more than 3 sentences.

Answer rating: 100% (QA)

a The payoff to the above exotic derivative can be replicated as a package involving one or more zer... View the full answer