Answer Happy

Suppose you are a corporate treasurer, and you manage the cash
savings of your firm. You
don’t want to lose any initial investment and wish to make a
return higher than the risk-free rate
𝑆𝑆𝑇𝑇 −100
in one year: 100 × (1 + 0.8 × max � , 0�), i.e.,
this product guarantees you never lose a
in some cases. Your bank proposes a product that costs £100 and
delivers the following payoff
𝑆𝑆𝑇𝑇
penny and gives you 80% of ‘‘gain’’ if the stock price
appreciates. Will you invest in this product?
Justify your answer with calculations.