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Show how we derive the max payoff for the put in the similar way as for the calls below Pt > Max [11+ X (1+r

Show how we derive the max payoff for the put image text in transcribed

in the similar way as for the calls below

image text in transcribed

Pt > Max [11+ X (1+r dom) S4,0] Compare two ways to buy a stock so that you own it at time T: Cash-Flow now A. Buy the stock now - St B. Buy a call option and deposit PV(X) - Ct - X/(1 + r) Value at T ST MAX(ST-X, 0) +X Value of strategy B at time T: ST-X+X = ST if ST > X (i.e. the same as for strategy A). X when ST A => B must now cost > than A => Ct +X/(1+r) > St (and since Ct20) => Ct > MAX (St.X/(1+r), 0) => A boundary condition

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