Question: d ) [ 7 marks ] Consider two European - type options that have payoffs P _ ( 1 ) ( S _ ( T

) [7

marks

]

Consider two European

-

type options that have payoffs P

_(1) (

_(

)) =

max

(1 -

_(

), 0)

and P

_(2) (

_(

)) =

max

(1 - (

_(

)), 0),

where stock price S

_(

)

can take any value greater than zero. Both options have the same maturity date and are written on the same stock. Which of these options costs more at date

0 ?

Explain your answer.

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