Anyone actually get what the solution is doing? I find the notations overwhelming especially when it's not defined, as if we should know them.
S06 Q8 (v) Hi Jensen, I think that this is the hardest CT8 question ever - part (v) should be worth much more than 10 marks in my opinion! Draw a graph of the manager's fee versus S1 - this is called a position diagram and can help I think. I have drawn this and scanned to PDF, email me for a copy johnpotter@bpp.com. If S < 100 then the manager's fee is 0.1% of S. When S >100 a call option kicks in for an extra 0.4%. But this extra call option has been pushed up by a rectangle (height 0.4) between 100 and infinity. When S > U another call option kicks in for an extra 0.5%. But this extra call option has been pushed up by a rectangle (height 0.005U) between U and infinity. If you get a nightmare question like this, it is maybe a good idea to draw a position diagram like this, it may help you construct the right portfolio or even get you marks for just appearing to be thinking along the right lines - if I was marking a script with a diagram like this, I would be thinking that the student understood it and would be wanting to award marks where I could Like I said though, even with this diagram and the right replicating portfolio, we still need to put the numbers in and find U - yuck! :-( Having said all that, the pass rate on this exam was 61% Good luck! John
Hi John I initially guessed that I need two options to do this, but after looking at the hint suggesting the use of four options, I got confused. I'll send you an email to get that diagram of yours; must be helpful since I like visuals
John I looked at the diagram, but I still couldnt see how that relates to the suggested solution more like which part of the graph corresponds to which c in the solution. geez, I dont know if I should be happy or sad if I see a question like this pop up.
exactly my thoughts. It'll be a good problem to solve, outside the exams and in our sweet time. UPDATE: Due to many subsequent request for the diagram, I have attached it here.
