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position diagrams - solution 2.10

G

Gareth

Member
in chapter two, question 2.10 asks "What other factors besides the initial outlay do the diagrams ignore?"

One of the answers is "any income payable by the underlying asset in the period between now and the strike date".

I can't see how this is relevant - if you are long or short in a contract whose payoff is a function of only the expiry price S_T, then how can the price S_t for t=0 to T be affect the value to the holder?
 
It isn't relevent which is precisely why it is not included.
However if you where to artificially construct the contract then the price of contract would include the value of the expected income from the asset, so the uninitiated might be confused.
This is one of those cases where the examiner expects you to state the obvious...
 
i see what you mean, although i question whether that is the same question - i.e. given we have a market that sells the actual contract, not a dynamic replicating portfolio, then share price before expiry is irrelevent.
 
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