A game is defined by its payoff which is dependent on the terminal price of stock ABC (S T ) and its expiry at time T. The table and the chart below give the payoff of this game.

A game is defined by its payoff which is dependent on the terminal price of stock ABC (S T ) 

and its expiry at time T. The table and the chart below give the payoff of this game.  

 

 

 

Maturity (years) Bid (%) Offer (%) Swap Rate (%)

2 5.03 5.06 5.045

4 5.35 5.39 5.370

7 5.65 5.68 5.665

10 5.83 5.87 5.850

Stock Price (S T ) Payoff

S T  <= $80 $20

$80 < S T  <=$90 S T  – $60

$90 < S T  <=$110 $120 – S T

$110 < S T  <=$120 S T  – $100

S T  >= $120 $20FIN359  Tutor-Marked Assignment 

Construct a strategy to use call and put options or other instruments (if necessary) to replicate 

this game’s payoff. 

 

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