This
contract
will
p
ay
o
ff
s
tock
price
at
e
xpiry
squared,
S
T
2
,
g
iven
s
tock
p
rice
is
less
t
han
t
he
strike
price,
K
.
That
is
d
efined
b
y
the
f
ollowing
function:
Given
that
t
he
underlying
s
tock
is
a
ssumed
t
o
f
ollow
Geometric
Brownian
M
otion;
(A) Use
R
isk-Neutral
Valuation
t
o
derive
the
f
air
price
of
t
he
s
ecurity
at
time
t
in
terms
of
the
stock
price,
S,
a
t
t
ime
t
.
T
his
w
ill
b
e
r
eferred
t
o
as
G
.
(
2
M
arks)
(H
INT:
Y
ou
will
first
need
to
d
erive
t
he
s
tochastic
process
t
hat
is
f
ollowed
b
y
Y
t
=
S
t2
,
Your
d
erivation
in
(a)
s