Describe the payoff from this derivative

Reference no: EM131404077

Assume that a non-dividend-paying stock has an expected return of μ and a volatility of σ. An innovative financial institution has just announced that it will trade a derivative that pays off a dollar amount equal to

at time T. The variables S0 and ST denote the values of the stock price at time zero and time T.

a. Describe the payoff from this derivative.

b. Use risk-neutral valuation to calculate the price of the derivative at time zero.

Reference no: EM131404077

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