A European-style exotic derivative (with stock as the underlying asset) has a terminal payoff depicted by the thick blue line

A European-style exotic derivative (with stock as the underlying asset) has a terminal payoff depicted by the thick blue line

Question:

A European-style exotic derivative (with stock as the underlying asset) has a terminal payoff depicted by the thick blue line in the diagram below: The y-axis denotes the terminal payoff of the derivative, and the x-axis denotes the terminal share price. The payoff to the above derivative can be replicated using a combination of the following components:Buy a zero-coupon bond with a face value of $4XYWrite a put option with a strike price of $1What are X and Y respectively?A.X = Hold 2 put options, each with a strike price of $6; and Y = Write 2 put options, each with a strike price of $5B.X = Hold 1 put options with a strike price of $12; and Y = Write 1 put option with a strike price of $15C.X = Hold 1 put option with a strike price of $6; and Y = Write 2 put options, each with a strike price of $5D.X = Hold 2 put options, each with a strike price of $6; and Y = Write 3 put options, each with a strike price of $5

Transcribed Image Text:

2880
10
9
7
654
3
210
0
1
2
3
4
5
6
7
8 9
10
ST

Expert Answer:

Answer rating: 100% (QA)

The detailed answer for the above question is provided bel
View the full answer