Part 1 (12 marks) Packaging Technique A European-style exotic derivative written on a non-dividend paying stock has a terminal payoff depicted by the thick line in the following diagram: (a) (2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and put options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (b) ( 2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and call options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (c) (4 marks) Write down the terminal payoff structure of this exotic derivative using either your construction in part (a) or (b) by filling in the table below. (c) (4 marks) Write down the terminal payoff structure of this exotic derivative using either your construction in part (a) or (b) by filling in the table below. (d) (2 marks) If the cost for setting up this exotic derivative option is \$5. What is the minimumin terminal share price for the above exotic derivative to be profitable? (e) (2 marks) What are investors' predictions on the market movement if they wish to buy this exotic derivative? Limit your discussion to no more than 3 sentences. Page 1 of 4 Part 1 (12 marks) Packaging Technique A European-style exotic derivative written on a non-dividend paying stock has a terminal payoff depicted by the thick line in the following diagram: (a) (2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and put options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (b) ( 2 marks) The payoff to the above exotic derivative can be replicated as a package involving one or more zero-coupon bonds, shares or/and call options. Write down the component pieces of this package, being explicit with respect to long/short positions, the respective strike prices of the options and the face value of the bond. (c) (4 marks) Write down the terminal payoff structure of this exotic derivative using either your construction in part (a) or (b) by filling in the table below. (c) (4 marks) Write down the terminal payoff structure of this exotic derivative using either your construction in part (a) or (b) by filling in the table below. (d) (2 marks) If the cost for setting up this exotic derivative option is \$5. What is the minimumin terminal share price for the above exotic derivative to be profitable? (e) (2 marks) What are investors' predictions on the market movement if they wish to buy this exotic derivative? Limit your discussion to no more than 3 sentences. Page 1 of 4
