Question: Consider a European (K, t) call option whose return at expiration time is capped by the amount B. That is, the payoff at t is

Consider a European (K, t) call option whose return at expiration time is capped by the amount B. That is, the payoff at t is

min((S(t) K) +, B).

Explain how you can use the BlackScholes formula to find the no-arbitrage cost of this option. Hint: Express the payoff in terms of the payoffs from two plain (uncapped) European call options.

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