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An investment firm is offering you a financial product whose payoff is linked to ABC...

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Finance

An investment firm is offering you a financial product whose payoff is linked to ABC stock price. If the price of ABC stock in 6 months is more than $100, you get nothing. If the price is less than $100, you get paid the difference between the price of the stock and $100. The risk-free rate of return with continuous compounding is 5% for all maturities, and the stock is currently trading at $100. The stock pays no dividend. The following options on ABC stock are also trading:

Option Type K $ Maturity (Months) Price ($)
Put 100 3 5
Call 100 5 7

How much should you be paying for the product?

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