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Figure 1 constructs a relationship between CHDD and profit such that every CHDD value now represents a monetary value in terms of positive and negative profits.
Now, the company's risk can be defined as having a low value of CHDD for a certain period that leads to a loss.
Let K be the strike value, x = CHDD, let f(x) be the probability density function of CHDD, and tick the monetary value for each CHDD.
The above results from the fact that CHDD is a summation process and certainly a submartingale compared to the underlying asset of an ordinary option.
E[max (K - CHDD, 0)] N (K - PB + P[M.sup.*]) [greater than or equal to] C.
In the current case, the profit function is a deterministic function that is a payoff function of the index value CHDD. Therefore, CHDD can be seen as the resource that produces the profit.
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