A financial institution plans to offer a security that pays off a dollar amount equal to s at time T.

(a) Use risk-neutral valuation to calculate the price of the security at time t in terms of the stock price S at time t. (Hint: The expected value of $ can be calculated from the mean and variance of Sr given in Section 13.1.)

(b) Confirm that your price satisfies the differential equation (13.16).

AppendixLO1