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Question # 4 (10 Points) Use the following information and the Black-Scholes-Merton Model of option valuation. Round all figures to four decimal places. A client

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Question \# 4 (10 Points) Use the following information and the Black-Scholes-Merton Model of option valuation. Round all figures to four decimal places. A client of your bank wants to buy a structured with the note payoff at maturity (T) linked to the asset price SS ) at that time. The client wishes to incorporate/embed into the note the dollar payoff (not profit) of a debit strategy standard strangle on the asset with K1=$85 and K2=$115. If $X is the dollar payoff of the embedded strategy, then the note payoff at maturity will be A+B$X, where A=$110 and B=0.75. (a) What is the current (t=0) fair value of the Note? (b) Holding other things the same, for the note to sell at par (Face Value) now, what needs to be the value $A (rounded up to four decimal places)? PROVIDE KEY WORK DETAILS BELOW. ANSWER: Question \# 4 (10 Points) Use the following information and the Black-Scholes-Merton Model of option valuation. Round all figures to four decimal places. A client of your bank wants to buy a structured with the note payoff at maturity (T) linked to the asset price SS ) at that time. The client wishes to incorporate/embed into the note the dollar payoff (not profit) of a debit strategy standard strangle on the asset with K1=$85 and K2=$115. If $X is the dollar payoff of the embedded strategy, then the note payoff at maturity will be A+B$X, where A=$110 and B=0.75. (a) What is the current (t=0) fair value of the Note? (b) Holding other things the same, for the note to sell at par (Face Value) now, what needs to be the value $A (rounded up to four decimal places)? PROVIDE KEY WORK DETAILS BELOW

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