A European-style exotic derivative (with stock as the underlying asset) has a terminal payoff depicted by the
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Question:
A European-style exotic derivative (with stock as the underlying asset) has a terminal payoff depicted by the thick blue line in the diagram below:
The y-axis denotes the terminal payoff of the derivative, and the x-axis denotes the terminal share price. The payoff to the above derivative can be replicated using a combination of the following components:
- Buy a zero-coupon bond with a face value of $4
- X
- Y
- Write a put option with a strike price of $1
What are X and Y respectively?
A. | X = Hold 2 put options, each with a strike price of $6; and Y = Write 2 put options, each with a strike price of $5 | |
B. | X = Hold 1 put options with a strike price of $12; and Y = Write 1 put option with a strike price of $15 | |
C. | X = Hold 1 put option with a strike price of $6; and Y = Write 2 put options, each with a strike price of $5 | |
D. | X = Hold 2 put options, each with a strike price of $6; and Y = Write 3 put options, each with a strike price of $5 |
Related Book For
Investment Analysis and Portfolio Management
ISBN: 978-0538482387
10th Edition
Authors: Frank K. Reilly, Keith C. Brown
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