What is the exotic option

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Reference no: EM131458110

Question: Consider the following exotic option whose payoff at expiration is given by the stock price squared less a strike price if it has a positive value, zero otherwise:

max [S(1)²- K, 0]

Assuming that the strike price K is $2,500, determine the value of this exotic option under the assumption of no-arbitrage. If the market price of the call is $600, how would you trade to exploit this arbitrage opportunity?
Following data for a single-period binomial model:

· A stock's price S is $50. After six months, it either goes up by the factor U = 1.22095341 or it goes down by the factor D - 0.79881010.

· Options mature after T = 0.5 year and have strike price K = $45.

· A dollar invested in the money market account earns continuously compounded risk-free interest at 2 percent per year.

Reference no: EM131458110

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