Probability and Statistics for Engineering and the Sciences
9th Edition
ISBN: 9781305251809
Author: Jay L. Devore
Publisher: Cengage Learning
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Textbook Question
Chapter 11.3, Problem 27E
The output of a continuous extruding machine that coats steel pipe with plastic was studied as a
- a. Construct the ANOVA table.
- b. Use appropriate F tests to show that none of the F ratios for two- or three-factor interactions is significant at level .05.
- c. Which main effects appear significant?
- d. With x..1. = 5 8242, x..2. = 5 9732, and x..3. = 11,210, use Tukey’s procedure to identify significant differences among the levels of factor C.
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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 11 Solutions
Probability and Statistics for Engineering and the Sciences
Ch. 11.1 - An experiment was carried out to investigate the...Ch. 11.1 - Four different coatings are being considered for...Ch. 11.1 - Prob. 3ECh. 11.1 - In an experiment to see whether the amount of...Ch. 11.1 - In an experiment to assess the effect of the angle...Ch. 11.1 - A particular county employs three assessors who...Ch. 11.1 - Prob. 7ECh. 11.1 - The paper Exercise Thermoregulation and...Ch. 11.1 - The article The Effects of a Pneumatic Stool and a...Ch. 11.1 - Prob. 10E
Ch. 11.1 - Prob. 11ECh. 11.1 - Prob. 12ECh. 11.1 - Prob. 13ECh. 11.1 - Prob. 14ECh. 11.1 - The power curves of Figures 10.5 and 10.6 can be...Ch. 11.2 - In an experiment to assess the effects of curing...Ch. 11.2 - Prob. 17ECh. 11.2 - The accompanying data resulted from an experiment...Ch. 11.2 - A two-way ANOVA was carried out to assess the...Ch. 11.2 - The article Fatigue Limits of Enamel Bonds with...Ch. 11.2 - In an experiment to investigate the effect of...Ch. 11.2 - Prob. 22ECh. 11.2 - Prob. 23ECh. 11.2 - Prob. 24ECh. 11.2 - Prob. 25ECh. 11.2 - Prob. 26ECh. 11.3 - The output of a continuous extruding machine that...Ch. 11.3 - Prob. 28ECh. 11.3 - Prob. 29ECh. 11.3 - Prob. 30ECh. 11.3 - Nickel titanium (NiTi) shape memory alloy (SMA)...Ch. 11.3 - Prob. 32ECh. 11.3 - Prob. 33ECh. 11.3 - The article The Responsiveness of Food Sales to...Ch. 11.3 - Prob. 35ECh. 11.3 - Prob. 36ECh. 11.3 - Prob. 37ECh. 11.4 - The accompanying data resulted from an experiment...Ch. 11.4 - The accompanying data resulted from a 23...Ch. 11.4 - In a study of processes used to remove impurities...Ch. 11.4 - Prob. 41ECh. 11.4 - Prob. 42ECh. 11.4 - Prob. 43ECh. 11.4 - a. In a 24 experiment, suppose two blocks are to...Ch. 11.4 - a. An experiment was carried out to investigate...Ch. 11.4 - Prob. 46ECh. 11.4 - a. In a seven-factor experiment (A,, G), suppose a...Ch. 11.4 - The article Applying Design of Experiments to...Ch. 11 - The results of a study on the effectiveness of...Ch. 11 - Prob. 51SECh. 11 - Prob. 52SECh. 11 - In an automated chemical coating process, the...Ch. 11 - Coal-fired power plants used in the electrical...Ch. 11 - Impurities in the form of iron oxides lower the...Ch. 11 - Factorial designs have been used in forestry to...Ch. 11 - Prob. 57SECh. 11 - Prob. 58SECh. 11 - The bond strength when mounting an integrated...Ch. 11 - Prob. 60SECh. 11 - Prob. 61SE
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- Question 1. Your manager asks you to explain why the Black-Scholes model may be inappro- priate for pricing options in practice. Give one reason that would substantiate this claim? Question 2. We consider stock #1 and stock #2 in the model of Problem 2. Your manager asks you to pick only one of them to invest in based on the model provided. Which one do you choose and why ? Question 3. Let (St) to be an asset modeled by the Black-Scholes SDE. Let Ft be the price at time t of a European put with maturity T and strike price K. Then, the discounted option price process (ert Ft) t20 is a martingale. True or False? (Explain your answer.) Question 4. You are considering pricing an American put option using a Black-Scholes model for the underlying stock. An explicit formula for the price doesn't exist. In just a few words (no more than 2 sentences), explain how you would proceed to price it. Question 5. We model a short rate with a Ho-Lee model drt = ln(1+t) dt +2dWt. Then the interest rate…arrow_forwardIn 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.)arrow_forwardThe managing director of a consulting group has the accompanying monthly data on total overhead costs and professional labor hours to bill to clients. Complete parts a through c. Question content area bottom Part 1 a. Develop a simple linear regression model between billable hours and overhead costs. Overhead Costsequals=212495.2212495.2plus+left parenthesis 42.4857 right parenthesis42.485742.4857times×Billable Hours (Round the constant to one decimal place as needed. Round the coefficient to four decimal places as needed. Do not include the $ symbol in your answers.) Part 2 b. Interpret the coefficients of your regression model. Specifically, what does the fixed component of the model mean to the consulting firm? Interpret the fixed term, b 0b0, if appropriate. Choose the correct answer below. A. The value of b 0b0 is the predicted billable hours for an overhead cost of 0 dollars. B. It is not appropriate to interpret b 0b0, because its value…arrow_forward
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