Consider the contract paying 100 lnst at time t 025, Ask an Expert

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Consider the contract paying 100 ln(S(t)) at time t = 0:25: Suppose the current price of the stock S(0) is 125: Observe that the tangent to the log contract constructed at the point S(0) lies above the log contract. Use this observation to develop an upper bound for the price of the contract paying 100 ln(S(t)): The continuously compounded interest rate for the three month maturity is currently 5:6%: Describe the arbitrage strategy to be conducted if the upper bound was violated.

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Financial Management, Finance

Category:- Financial Management
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