Question: A (K1, t1, K2, t2 ) double call option is one that can be exercised either at time t1 with strike price K1 or at

A (K1, t1, K2, t2 ) double call option is one that can be exercised either at time t1 with strike price K1 or at time t2 (t2 > t1) with strike price K2.

(a) Argue that you would never exercise at time t1 if K1 > e^-r(t2-t1)K2.

(b) Assume that K1 < e^-r(t2-t1)K2. Argue that there is a valuexsuch that the option should be exercised at timet1 ifS(t1) >xand not exercised ifS(t1) <x.

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