Consider european digital put option

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Consider a European digital put option that pays $1 if S(T) ≤ K and $0 otherwise. How much does this option cost? To find this, consider a portfolio that is long a digital put and long a digital call option. How much does this portfolio payoff at time T? How much is that portfolio worth at time t < T? Use the price of the portfolio and the price for a digital call to find the price of a digital put. Assume r, T, K, S(0) and 4 are all variables.

Reference no: EM131347630

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