Question: A gap insurance covers the difference between the amount owed and the actual value of a vehicle. It is useful mainly for new vehicles whose

A gap insurance covers the difference between the amount owed and the actual value of a vehicle.

It is useful mainly for new vehicles whose value depreciates rapidly once you drive off the dealership lot. You

lease for three years (and you'll return the car in three years) a car that has an initial value of the car is $30,000

and you are thinking to buy a $10,000 gap insurance.

The following separate instruments are available for you:

A call option with maturity in three years, strike price $20,000 and underlying asset the value

of the car in three years. The price today of this call option is $5,000.

A call option with maturity in three years, strike price $30,000 and underlying asset the value

of the car in three years. The price today of this call option is $2,000.

A bank account with zero interest rate per year (for simplicity)

How much would you pay for the gap insurance in case you decide to buy it?

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