• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

September 2008 Q8

S

SABeauty

Member
For part v can someone explain how the fee is written as basic fee, 2 calls and 2 special options
 
Personally, I think the best way to tackle this kind of question is to draw payoff diagrams. So I'd do that for the basic fee, a call option and a special option. These are my "jigsaw" pieces.

Then I'd draw a pyoff diagram for the proposed new fee (with different gradient slopes, separated by discontinuities at S1=S0 and S1=U). Then I'd fit the jigsaw pieces inside this one.

I know that some people prefer to work algebraically though - it's your choice which you use in the exam.

What do others think?
 
Well, to be honest initially I found it easier to write out the payoff function and then fill in the blanks, but after seeing the graph, I have a greater understanding of the situation. So I guess it depends on your strengths as a student.
 
You must log in or register to reply here.
Back
Top