Sep 09_2 ASET

Using the formula on page 18 of the Formulae and Tables book gives an answer partially different from using substitution. Precisely, the term;-

 

I havent done this for a while and your question is not explicit. It looks like an exotic (binary..maybe) option of some kind. The price of the underlying asset is not lognormal.

It looks like to me the first term is


K * Integral (1/a ln(K) to ∞) of f(ST) dST

and second term

K * Integral (1/a ln(K) to ∞) of ST*f(ST) dST

Therefore
the payoff based on the first term is you get a fixed payoff K if ST>1/a ln(K)

the payoff for the second term if that you get a payoff of K*ST if ST>1/a ln(K) where ST is a random variable

 

Yep the underlying is normal, that's why I used the formula for the truncated expectation of a normal on page 18 of the formula book, but it leads me to the expression, 'is replaced with....'. The examiner's got the expression ''precisely, the term....''

Thanks Sonnyshook, I hope I am clear.