If the strike price of a European call is K = 52, and the expiration of this call is at the end of 6 days, what is the payoff of the call?

QUESTION:

(1) If the strike price of a European call is K = 52, and the expiration of this call is at the end of 6 days, what is the payoff of the call? That is, what is the value of (S6 – K)+.

(2) Could you use the present value of (S6 – K)+ in 1) as an approximation to the cost of the call? How could you derive a ‘better’ cost?


 

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