Hello, For Q9 in the Sept2023 exam: Why do they add 0.1*exp(-0.02*10) at the end when calculating the price? Also, how does this question differ from the first practice question in the chapter that suggests a long put and short call? The wording seems almost identical. Thanks in advance!
This bit is cash accumulating to 10% to make sure that the floor is 10%. The principle of the hedge can be achieved in many different ways: long call (10), short call (50) long put (10), short put (50) underlying, short call (50) and long put (10) However, the "heights" of these strategies would be different on the position diagram. So, if we want the "height" to be a particular number (10 in this case) then we need to use cash. Challenge for you - create the same diagram in Excel using all 3 of these strategies and use cash to correct the height of your diagrams. John
