STATISTICS (LL)
3rd Edition
ISBN: 9781119826453
Author: Lock
Publisher: WILEY
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Chapter 1.1, Problem 26E
To determine
Explain the method of data collection.
Identify cases and variables for the study.
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In this problem, we consider a Brownian motion (W+) t≥0. We consider a stock model (St)t>0
given (under the measure P) by
d.St 0.03 St dt + 0.2 St dwt,
with So 2. We assume that the interest rate is r = 0.06. The purpose of this problem is to
price an option on this stock (which we name cubic put). This option is European-type, with
maturity 3 months (i.e. T = 0.25 years), and payoff given by
F = (8-5)+
(a) Write the Stochastic Differential Equation satisfied by (St) under the risk-neutral measure
Q. (You don't need to prove it, simply give the answer.)
(b) Give the price of a regular European put on (St) with maturity 3 months and strike K = 2.
(c) Let X =
S. Find the Stochastic Differential Equation satisfied by the process (Xt)
under the measure Q.
(d) Find an explicit expression for X₁ = S3 under measure Q.
(e) Using the results above, find the price of the cubic put option mentioned above.
(f) Is the price in (e) the same as in question (b)? (Explain why.)
Problem 4. Margrabe formula and the Greeks (20 pts)
In the homework, we determined the Margrabe formula for the price of an option allowing you to
swap an x-stock for a y-stock at time T. For stocks with initial values xo, yo, common volatility
σ and correlation p, the formula was given by
Fo=yo (d+)-x0Þ(d_),
where
In (±²
Ꭲ
d+
õ√T
and
σ = σ√√√2(1 - p).
дго
(a) We want to determine a "Greek" for ỡ on the option: find a formula for
θα
(b) Is
дго
θα
positive or negative?
(c) We consider a situation in which the correlation p between the two stocks increases: what
can you say about the price Fo?
(d) Assume that yo< xo and p = 1. What is the price of the option?
We consider a 4-dimensional stock price model given (under P) by
dẴ₁ = µ· Xt dt + йt · ΣdŴt
where (W) is an n-dimensional Brownian motion,
π = (0.02, 0.01, -0.02, 0.05),
0.2
0
0
0
0.3
0.4
0
0
Σ=
-0.1
-4a За
0
0.2
0.4 -0.1 0.2)
and a E R. We assume that ☑0 = (1, 1, 1, 1) and that the interest rate on the market is r = 0.02.
(a) Give a condition on a that would make stock #3 be the one with largest volatility.
(b) Find the diversification coefficient for this portfolio as a function of a.
(c) Determine the maximum diversification coefficient d that you could reach by varying the
value of a?
2
Chapter 1 Solutions
STATISTICS (LL)
Ch. 1.1 - Prob. 1ECh. 1.1 - For the situations described in Exercises 1.1 to...Ch. 1.1 - For the situations described in Exercises 1.1 to...Ch. 1.1 - For the situations described in Exercises 1.1 to...Ch. 1.1 - For the situations described in Exercises 1.1 to...Ch. 1.1 - For the situations described in Exercises 1.1 to...Ch. 1.1 - In Exercises 1.7 to 1.10, a relationship between...Ch. 1.1 - In Exercises 1.7 to 1.10, a relationship between...Ch. 1.1 - Prob. 9ECh. 1.1 - Prob. 10E
Ch. 1.1 - Student Survey Variables Data 1.1 introduced the...Ch. 1.1 - Countries of the World Information about the...Ch. 1.1 - Spider Sex Play Spiders regularly engage in spider...Ch. 1.1 - Hormones and Fish Fertility When women take birth...Ch. 1.1 - Fast-Twitch Muscles and Race Example 1.5 studied a...Ch. 1.1 - Rowing Solo Across the Atlantic Ocean On January...Ch. 1.1 - Largest Cities in the World Seven of the ten...Ch. 1.1 - Trans-Generational Effects of Diet Can experiences...Ch. 1.1 - Trans-Generational Effects of Environment In...Ch. 1.1 - Hookahs and Health Hookahs are waterpipes used for...Ch. 1.1 - Prob. 21ECh. 1.1 - Don’t Text While Studying! For the 2015 Intel...Ch. 1.1 - Prob. 23ECh. 1.1 - Prob. 24ECh. 1.1 - Prob. 25ECh. 1.1 - Prob. 26ECh. 1.1 - Prob. 27ECh. 1.2 - In Exercises 1.28 to 1.31, state whether the data...Ch. 1.2 - Prob. 29ECh. 1.2 - Prob. 30ECh. 1.2 - Prob. 31ECh. 1.2 - Prob. 32ECh. 1.2 - Prob. 33ECh. 1.2 - Prob. 34ECh. 1.2 - Prob. 35ECh. 1.2 - In Exercises 1.36 to 1.39, a biased sampling...Ch. 1.2 - Prob. 37ECh. 1.2 - Prob. 38ECh. 1.2 - Prob. 39ECh. 1.2 - In Exercises 1.40 to 1.45, state whether or not...Ch. 1.2 - Prob. 41ECh. 1.2 - Prob. 42ECh. 1.2 - Prob. 43ECh. 1.2 - In Exercises 1.40 to 1.45, state whether or not...Ch. 1.2 - Prob. 45ECh. 1.2 - Prob. 46ECh. 1.2 - Prob. 47ECh. 1.2 - In Exercises 1.46 to 1.50, indicate whether we...Ch. 1.2 - Prob. 49ECh. 1.2 - Prob. 50ECh. 1.2 - Prob. 51ECh. 1.2 - Wearing a Uniform to Work The website fox6now.com...Ch. 1.2 - Prob. 53ECh. 1.2 - Prob. 54ECh. 1.2 - Prob. 55ECh. 1.2 - Prob. 56ECh. 1.2 - Prob. 57ECh. 1.2 - Prob. 58ECh. 1.2 - Prob. 59ECh. 1.2 - Prob. 60ECh. 1.2 - Prob. 61ECh. 1.2 - Prob. 62ECh. 1.2 - Prob. 63ECh. 1.2 - Interviewing the Film Crew on Hollywood Movies...Ch. 1.2 - Sampling Some Hardee’s Restaurants The Hardee’s...Ch. 1.3 - Prob. 66ECh. 1.3 - In Exercises 1.66 to 1.71, we give a headline that...Ch. 1.3 - Prob. 68ECh. 1.3 - Prob. 69ECh. 1.3 - In Exercises 1.66 to 1.71, we give a headline that...Ch. 1.3 - Prob. 71ECh. 1.3 - Exercises 1.72 to 1.77 describe an association...Ch. 1.3 - Prob. 73ECh. 1.3 - Prob. 74ECh. 1.3 - Prob. 75ECh. 1.3 - Exercises 1.72 to 1.77 describe an association...Ch. 1.3 - Prob. 77ECh. 1.3 - In Exercises 1.78 to 1.81, we describe data...Ch. 1.3 - Prob. 79ECh. 1.3 - Prob. 80ECh. 1.3 - Prob. 81ECh. 1.3 - Prob. 82ECh. 1.3 - Prob. 83ECh. 1.3 - Prob. 84ECh. 1.3 - Prob. 85ECh. 1.3 - Prob. 86ECh. 1.3 - Prob. 87ECh. 1.3 - Prob. 88ECh. 1.3 - Prob. 89ECh. 1.3 - Do Online Cat Videos Improve Mood? Exercise 1.59...Ch. 1.3 - Green Spaces Make Kids Smarter A recent article50...Ch. 1.3 - Prob. 92ECh. 1.3 - Sitting Is the New Smoking A 2014 headline reads...Ch. 1.3 - Late Night Eating It is well-known that lack of...Ch. 1.3 - To Spoon or Not to Spoon? Does cuddling after sex...Ch. 1.3 - Prob. 96ECh. 1.3 - Prob. 97ECh. 1.3 - Diet Cola and Weight Gain in Humans A study59...Ch. 1.3 - Prob. 99ECh. 1.3 - Urban Brains and Rural Brains A study published in...Ch. 1.3 - Prob. 101ECh. 1.3 - Prob. 102ECh. 1.3 - Prob. 103ECh. 1.3 - Do Children Need Sleep to Grow? About 60% of a...Ch. 1.3 - Prob. 105ECh. 1.3 - Prob. 106ECh. 1.3 - Prob. 107E
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