Lecture 8 Supplementary Part 2

Suppose you have an xyz shout call with a strike

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Unformatted text preview: get: 3/31/12 St1 + D – K + max[P(St1, T ‐ t1) – (D – K(1 ‐ e‐r(T‐t1))) , 0] 6 2. Exo'c Op'ons Supplementary Slide 7 A Taxonomy of Exo'c Op'ons – Compound Op'ons Textbook pp 453‐457: St1 + D – K + max[P(St1, T ‐ t1) – (D – K(1 ‐ e‐r(T‐t1))) , 0] So an American Call Op'on on a dividend paying stock can be replicated by: 1.  Long the stock, with present value S0. (S0 is the present value of St1 +D) 2.  Less (or lending an equivalent value of) the present value of the strike, Ke‐rt1 3.  Long a Compound Op'on – A CallOnPut – with a strike price D – K(1‐e‐r(T‐ t1)) and maturity date t . 1 3/31/12 7 2. Exo'c Op'ons Supplementary Slide 8 A Taxonomy of Exo'c Op'ons – Shout Op'on •  Example (P.S. 7 Qn 4): A European shout op1on is an op'o...
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