Question: Lets say S = $40, = 0.30, r = 0.08, T = 1, and = 0. Also let Q = $40, Q = 0.30, Q

Lets say S = $40, = 0.30, r = 0.08, T = 1, and = 0. Also let Q = $40, Q = 0.30, Q = 0, and = 1. An exchange call with S as the price of the underlying asset and Q as the price of the strike asset.

  1. What is the price of an exchange call with S as the underlying asset and Q as the strike price?
  2. Now suppose Q = 0.40. What is the price of the exchange call?
  3. Explain and discuss part a and b.

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