Mathematical Statistics with Applications
7th Edition
ISBN: 9780495110811
Author: Dennis Wackerly, William Mendenhall, Richard L. Scheaffer
Publisher: Cengage Learning
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Chapter 1.3, Problem 16E
To determine
Find the values of
Also find the intervals for
Compare the results with the
Also compare the results with the results obtained in Exercise 1.15.
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Students have asked these similar questions
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
Mathematical Statistics with Applications
Ch. 1.1 - For each of the following situations, identify the...Ch. 1.2 - Are some cities more windy than others? Does...Ch. 1.2 - Of great importance to residents of central...Ch. 1.2 - The top 40 stocks on the over-the-counter (OTC)...Ch. 1.2 - Given here is the relative frequency histogram...Ch. 1.2 - The relative frequency histogram given next was...Ch. 1.2 - The self-reported heights of 105 students in a...Ch. 1.2 - An article in Archaeometry presented an analysis...Ch. 1.3 - Resting breathing rates for college-age students...Ch. 1.3 - It has been projected that the average and...
Ch. 1.3 - The following results on summations will help us...Ch. 1.3 - Prob. 12ECh. 1.3 - Prob. 13ECh. 1.3 - Refer to Exercise 1.3 and repeat parts (a) and (b)...Ch. 1.3 - Refer to Exercise 1.4 and repeat parts (a) and (b)...Ch. 1.3 - Prob. 16ECh. 1.3 - Prob. 17ECh. 1.3 - Prob. 18ECh. 1.3 - Prob. 19ECh. 1.3 - Prob. 20ECh. 1.3 - The manufacturer of a new food additive for beef...Ch. 1 - Prove that the sum of the deviations of a set of...Ch. 1 - The mean duration of television commercials is 75...Ch. 1 - Aqua running has been suggested as a method of...Ch. 1 - The following data give the lengths of time to...Ch. 1 - Prob. 26SECh. 1 - Prob. 27SECh. 1 - The discharge of suspended solids from a phosphate...Ch. 1 - Prob. 29SECh. 1 - Compared to their stay-at-home peers, women...Ch. 1 - Prob. 31SECh. 1 - Prob. 32SECh. 1 - Prob. 33SECh. 1 - Prob. 34SECh. 1 - Prob. 35SECh. 1 - Prob. 36SECh. 1 - Prob. 37SECh. 1 - Prob. 38SE
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