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Now, we want to choose the number of options and the strike price to have nK=M, in addition to the budget constraint. When nK=M, the
Now, we want to choose the number of options and the strike price to have nK=M, in addition to the budget constraint. When nK=M, the payoff of the option-based insurance strategy simplifies to WT=M+n[STK]+=max[M,nST], that is the maximum between the minimum wealth and the value of n shares of the underlying asset. What should be the strike price of an option in this case? Hint: You can rewrite the budget constraint in the form W0=Mb0,T+C0, where C0 is the price of a call writter on a modified underlying asset with a strike price different from K. Then, solve this equation for K by calling the function fsolve again. $92.48 $109.11 $117.76 $143.81
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