Question
(a) You are a derivatives trader. A salesperson comes to you with a strange request. An important customer wants to buy a derivative with the
(a) You are a derivatives trader. A salesperson comes to you with a strange request. An important customer wants to buy a derivative with the following property: it will make a single payout of $1000 whenever Google stockwhich, you notice, is currently trading at $628.28first trades at $1000. At what price would you do the trade, and why? (Assume that Google does not pay dividends. This is an important customer, so you should try to give as good a price as possible; but make sure that you do not risk losing money on the trade.)
(b) Later, a different client comes back wanting to do a somewhat similar trade. Now, though, the customer wants to buy a derivative that pays $1000 whenever Google stock first trades at $100. At what price would you do the trade, and why?
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