Question
Assume Investor Casey is optimistic that a vaccine for COVID-19 will be found soon, thus has estimated the following probabilities pertaining to the S&P performance:
Assume Investor Casey is optimistic that a vaccine for COVID-19 will be found soon, thus has estimated the following probabilities pertaining to the S&P performance: 16% that S&P falls below the low strike price, X1, so Casey pays Sam; 71% that the S&P remains between the strike prices, so Casey makes no payment; and 13% that the S&P will move at and above the higher strike price, X2, so Sam pays Casey. Graph the lognormal probability distribution, with the S&P index movements represented on the x-axis and the positive investment returns on the y-axis. (NOTE: Probability distributions and profit loss diagrams are different, but they arguably convey similar information.)
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