1. Posts in the subject areas are now being moderated. Please do not post any details about your exam for at least 3 working days. You may not see your post appear for a day or two. See the 'Forum help' thread entitled 'Using forums during exam period' for further information. Wishing you the best of luck with your exams.
    Dismiss Notice

April 2013 Q9 (ii) (b)

Discussion in 'CT8' started by baidshryans, Mar 7, 2016.

  1. baidshryans

    baidshryans Member

    How and why can we conclude that the strike price of the option is equal to the initial price that is, $1, if S2/S1 is as given ?
     
    baidshryans, Mar 7, 2016
    #1
  2. Hemant Rupani

    Hemant Rupani Senior Member

    The form of call option is Max (S_T - K, 0)
    S_0=1 ... (given)
    As in Q, we need to find Max (S2/S1 -1, 0), we can compare it with call option as we shall utilize call option iff S2/S1> 1. Payoff to the investor will be [S2/S1 -1] (just like, receive S2/S1 and pay 1)
     
    Hemant Rupani, Mar 8, 2016
    #2
  3. Adithyan

    Adithyan Very Active Member

    Hi!

    I agree that S0 is 1 (given in question).
    But Value of option @ time 1 is = S1 phi(d1) - Ke^-r(T-1)phi(d2).

    How can you use S0=1 value in this equation?

    Please help
     
    Adithyan, Aug 22, 2019
    #3
  4. Orla

    Orla Made first post

    Why is it treated as a call option if it will only be exercised if s1<2?
    In my mind, the value is 100[ n(-d1) -e^rtn(-d2) ] as the upper limit is z (s1<2)
     
    Orla, May 10, 2021
    #4

Share This Page