Question
A European option exists on the stock of the company with the following non-standard payoff. Share price of the Company at Maturity = ST Option
A "European option" exists on the stock of the company with the following non-standard payoff.
Share price of the Company at Maturity = ST Option Payoff
ST> $10.00 ST> $10.00
$5.00 ST $10.00 $15.00
$0.00 ST< $5.00 $1.00
The time to maturity for the "European option" is 3 years.
Required
In your own words describe an approach and any proposed model or models to price this "option"? Also note if you could still assume "risk neutrality" and if so why? (Word Limit: 150 words).
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Public Finance and Public Policy
Authors: Jonathan Gruber
4th edition
1429278455, 978-1429278454
