Question: Exercise 8.5 Consider a European (K, t) call option whose return at expiration time is capped by the amount B. That is, the payoff at

Exercise 8.5 Consider a European (K, t) call option whose return

Exercise 8.5 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 Black-Scholes formula to find the no- arbitrage cost of this option. Hint: Express the payoff in terms of the payoffs from two plain (un- capped) European call options. Exercise 8.5 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 Black-Scholes formula to find the no- arbitrage cost of this option. Hint: Express the payoff in terms of the payoffs from two plain (un- capped) European call options

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