I am having trouble coming up with the -0.5 in the price equation. My approach was to calculate the probability that S is greater than K2. I have no problems with any of the other parts of the question. Thank you.
Sounds like your approach is correct, maybe something went wrong with the algebra? When calculating the probability, you'll want to take logs of both sides of the inequality, which will eventually resolve to: \(P(N(0,1)\geq-0.5)\). Let me know how you get on.
Oh gosh... I attempted this question almost two months ago (when I didn't have much practical experience yet with working through papers) and wrote it down as a problem question. I looked over it again last night without working it through fully, but yes, I just didn't take logs. Thank you for replying to such a trivial question!
