A cash on delivery option costs nothing at inception and has payoffs S(T) K p)...
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A cash on delivery option costs nothing at inception and has payoffs S(T) K p) if S(T) K. The problem is to determine p the deferred premium which is set at the inception of the contract to make the option have zero value. Note that this option payoff can be constructed with an European call and selling cash or nothing options. Find the value of p for parameters T = 1, r = 0.03, = 0.3, S(0) = 100, and K = 100. Plot the delta of this option at inception and close to expiration. Will this be hard to hedge?
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