In this question, youmustuse three components to form a portfolio and replicate the terminal payoff of the above derivative. The first componentmustinvolve taking along position on two stocksof the company.

In addition, you are provided with the following information:

• Current stock price of the company = $10 per share
• Annualrisk-free rate of interest=6% p.a. compounded continuously
• Stock volatility () = 20% per year

Required: Calculate thefair price(estimated at timet=0) of the derivative. State your answer in two decimals (e.g., $5.12). You may want to show your calculations, or briefly describe how you arrive at the final answer, so that partial marks can be allocated for incorrect answer. Also, the "BlackScholes.xlsx" calculator (found in lecture5) may be useful.