Sep 2008_q6(iii)

The solution to the question follows easily by realizing that it is a special case of a Bull-spread (one with gradient of middle payoff <1) + a digital option.

However I tried replicating as well,
Payoff Digital Option C(8580) C(14300) Total
0.9J<8580 7722 0 0 7722
8580<=0.9J<14300 7722 0.9J - 8580 0 *0.9J - 8580
8580<=0.9J 7722 0.9J - 8580 14300 - 09J *12870

*The last two don't add up, please help.

 

ok, I thought I was the only one struggling with this (after redoing this 5 times). Did you get 6370 something when you went via first principles?

 

I haven't looked for a fixed answer as yet, I was still looking for a general approach I will confirm.