Question

Assume that you are given a payoff function that is a straight line with slope 3 and y-intercept $-200. This payoff function is for an expiration in 3 months. Assume that the current price of the underlying stock is $60 and the annual risk free rate is 2%. What is the price of this payoff

Answer 1

Answer:

price of the payoff is -$19.01

Explanation:

The computation of the price of payoff is shown below:

But before that we have to do the following calculations

Equation of payoff is

= -$200 + 3 × current price

Now

price of payoff is

= -$200 ÷ (1.02)^(3 ÷ 12) + 3 × $60

= -$199.01 + $180

And, finally

The price of the payoff is -$19.01

The same is to be considered