(b) Consider an arbitrage-free securities market model, in which the risk-free interest rate is constant. There are two no dividend-paying shares whose price processes are given by S₁ (t) = S₁ (0)exp(0.1t +0.2W) S₂ (t) = S₂ (0)exp(0.125t + 0.3W₂) where We is a standard Brownian motion and t≥0. Determine the continuously compounded risk-free interest rate.
(b) Consider an arbitrage-free securities market model, in which the risk-free interest rate is constant. There are two no dividend-paying shares whose price processes are given by S₁ (t) = S₁ (0)exp(0.1t +0.2W) S₂ (t) = S₂ (0)exp(0.125t + 0.3W₂) where We is a standard Brownian motion and t≥0. Determine the continuously compounded risk-free interest rate.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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4b
Transcribed Image Text:(b) Consider an arbitrage-free securities market model, in which the risk-free interest rate is
constant. There are two no dividend-paying shares whose price processes are given by
S;(t) = S, (0)exp(0.1t + 0.2W;)
S2(t) = S2(0)exp(0.125t + 0.3W;)
where W; is a standard Brownian motion and t2 0. Determine the continuously
compounded risk-free interest rate.
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