9-2. The problem. Recall that call value at expiration, CT, isCT = max[0, ST - X]implies that C is a function of S and X.The problem:What is C0?From above,C0 = Cte-rtC0 = max[0, Ste-rt - Xe-rt]C0 = max[0, S0 - Xe-rt]implies that C is a function of S, X, r, and tBut at this point we have not captured the probability that S will be in the moneythis probability will depend upon volatility (?).
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