Previously, the emphasis was on obtaining information from clients. In this chapter, the emphasis was on preparing witnesses for trial. To properly prepare witnesses for trial, the paralegal needs to….
Draw the payoff function of the log-contract.
Log-contract The payoff of the log-contract on an underlying asset S is DT = – ln(ST / F0), where F0 is the forward price of S for maturity T.
(a) Draw the payoff function of the log-contract.
(b) Find the fair value D0 of the log-contract in the lognormal model as a function of r, σ and T.
(c) Imagine that, for a given maturity T, we know the prices of an infinite number of European calls and puts struck along a continuum between 0 and infinity. Consider a portfolio which is:
(i) long a quantity dK / K2 of puts struck at K <>0;
(ii) long a quantity dK / K2 of calls struck at K > F0.