Consider a contract that pays 1ST2K + ST1ST...
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Consider a contract that pays 1ST2K + ST1ST<K +1 at the maturity of the contract where K = 100 and T = 1. Assume that St follows the Black- Scholes model. Recall that under the Black-Scholes model, log has a normal distribution with mean (r.502)t and variance o²t. (a) Show that this contract can be statically hedged by binary options, put options, and a bond. (b) Compute the price of this contract at time 0, using the normality of log: and the Black-Scholes pricing formula. Model parameters are So = 100, r = 3%, and o = 20%. Consider a contract that pays 1ST2K + ST1ST<K +1 at the maturity of the contract where K = 100 and T = 1. Assume that St follows the Black- Scholes model. Recall that under the Black-Scholes model, log has a normal distribution with mean (r.502)t and variance o²t. (a) Show that this contract can be statically hedged by binary options, put options, and a bond. (b) Compute the price of this contract at time 0, using the normality of log: and the Black-Scholes pricing formula. Model parameters are So = 100, r = 3%, and o = 20%.
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a Show that this contract can be statically hed ged by binary options put options and a bond ANS ... View the full answer
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