For each of the following pairs of prices of non-dividend paying unlimited liability stock, S,…

For each of the following pairs of prices of non-dividend paying unlimited liability stock, S, and 1-year riskless zero-coupon bond, Z, with principal 1,

S=100,2=1,

S=90,Z=1,

S=100,Z=0.9,

S=110,Z=1,

find optimal rational bounds on the following 1-year contracts

(i) a digital call struck at 100

(ii) a digital put struck at 100

(iii) a portfolio of 0.5 digital calls struck at 90 and one call option struck at 110

(iv) a portfolio of 0.5 digital calls struck at 90 and one digital call option struck at 110

 

 

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