b) You need to decompose into two options. You have a knock-in call option with a strike of 60 and a knock-in price of 60 and you have a knockout call option with a strike of 100 and a knock-out price of 60. If you Google barrier options, you will find analytic formulas for both of these. I bet if you look hard enough you can even find a barrier option calculator online.
Patriot Corp. compensates executives with 10-year European call options which is granted at-the-money. If there is a signi?cant drop in the share price, the company’s board will reset the strike price of the options to equal the new share price. Then, the maturity of the repriced option will equal the remaining maturity of the original option. Suppose σ = 30%, r = 6%, δ = 0, and the original share price is $100. Calculate the following:
a. the value at grant of an option that will not be repriced
b. the value at grant of an option that is repriced when the share price reaches $60
