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d) Let S0=1. Consider a derivative Zt written on the stock which only pays at a prespecified maturity T and has the following payoff: ZT={ST3,0,ififSTK,ST
d) Let S0=1. Consider a derivative Zt written on the stock which only pays at a prespecified maturity T and has the following payoff: ZT={ST3,0,ififSTK,ST0 is a constant agreed upon at time 0 . Draw the payoff diagram of this derivative. Find Z0, the price of this derivative at time 0 . [10 marks] d) Let S0=1. Consider a derivative Zt written on the stock which only pays at a prespecified maturity T and has the following payoff: ZT={ST3,0,ififSTK,ST0 is a constant agreed upon at time 0 . Draw the payoff diagram of this derivative. Find Z0, the price of this derivative at time 0 . [10 marks]
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