An oil company decides to issue a contract that bas a payout after one year and after two years. After one year the investor gets the dollar value of the stock price at year one, provided

the stock trades between a lower bound of20 and an upper bound of 30. If it is below the lower bound, the investor gets the lower bound; If it is above the upper bound the investor gets the upper bound. The payout in year 2 bas the same format. The prices oftbe stock and several European caJI and put options are shown below. S(O) = 25; riskless rate= 5%, continuously compounded. The stock pays no dividends.

1. Draw the payout diagram of cash flows that occur at year 1.

2. Repeat the diagram for cash flows that occur at year 2.

3. Establish the value of the poition at date 0. You can use put call parity to compute certain missing option values if you want. Show all your calculations step by step.

Strike 1 year 2years 6.35 3.08 20 25 30 35 40 7.63 4.66 2.68 calls 0.45 0.15 0.73 2.28 20 25 30 35 40 0.38 1.86 4.79 8.74 puts 12.00 Strike 1 year 2years 6.35 3.08 20 25 30 35 40 7.63 4.66 2.68 calls 0.45 0.15 0.73 2.28 20 25 30 35 40 0.38 1.86 4.79 8.74 puts 12.00