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 ?
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)
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
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)