STATS:DATA+MODELS-MY LAB ACC >CUSTOM<
21st Edition
ISBN: 9780137643127
Author: DeVeaux
Publisher: PEARSON
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Chapter 15, Problem 10E
a.
To determine
Identify the distribution used to model the distribution.
b.
To determine
Find the probability that the randomly selected cell phone will be one of the last 100 to be produced.
c.
To determine
Find the probability that the first phone selected is either from the last 200 to be produced or from the first 50 to be produced.
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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 15 Solutions
STATS:DATA+MODELS-MY LAB ACC >CUSTOM<
Ch. 15.6 - As we noted a few chapters ago, the Pew Research...Ch. 15.6 - As we noted a few chapters ago, the Pew Research...Ch. 15.6 - Prob. 3JCCh. 15.6 - Prob. 4JCCh. 15 - Prob. 1ECh. 15 - Bernoulli 2 Do these situations involve Bernoulli...Ch. 15 - 7. Toasters A manufacturer ships toasters in...Ch. 15 - 8. Soccer A soccer learn estimates that they will...Ch. 15 - 9. Toasters again In a batch of 10,000 toasters,...Ch. 15 - 10. Soccer again If this team has 200 corner kicks...
Ch. 15 - 11. Sell! A car dealership sells an average of 5...Ch. 15 - 12. Passing on A large hospital has an average of...Ch. 15 - Telephone numbers A cable provider wants to...Ch. 15 - Serial numbers In an effort to check the quality...Ch. 15 - Component lifetimes Lifetimes of electronic...Ch. 15 - Website sales Suppose occurrences of sales on a...Ch. 15 - On time A Department of Transportation report...Ch. 15 - Lost luggage A Department of Transportation report...Ch. 15 - Hoops A basketball player has made 80% of his foul...Ch. 15 - Chips Suppose a computer chip manufacturer rejects...Ch. 15 - More hoops For the basketball player in Exercise...Ch. 15 - Chips ahoy For the computer chips described in...Ch. 15 - Customer center operator Raaj works at the...Ch. 15 - Cold calls Justine works for an organization...Ch. 15 - Blood Only 4% of people have Type AB blood.
On...Ch. 15 - Color blindness About 8% of males are color-blind....Ch. 15 - Coins and intuition If you flip a fair coin 100...Ch. 15 - Roulette and intuition An American roulette wheel...Ch. 15 - Lefties Assume that 13% of people are left-handed....Ch. 15 - Arrows An Olympic archer is able to hit the...Ch. 15 - Lefties, redux Consider our group of 5 people from...Ch. 15 - More arrows Consider our archer from Exercise...Ch. 15 - Prob. 33ECh. 15 - Still more arrows Suppose the archer from Exercise...Ch. 15 - Prob. 35ECh. 15 - International students At a certain college, 6% of...Ch. 15 - Prob. 37ECh. 15 - Frogs A wildlife biologist examines frogs for a...Ch. 15 - And more tennis Suppose the tennis player in...Ch. 15 - Prob. 40ECh. 15 - Apples An orchard owner knows that he’ll have to...Ch. 15 - Frogs, part II Based on concerns raised by his...Ch. 15 - Lefties, again A lecture hall has 200 seats with...Ch. 15 - No-shows An airline, believing that 5% of...Ch. 15 - Prob. 45ECh. 15 - Prob. 46ECh. 15 - Prob. 47ECh. 15 - Bank tellers I am the only bank teller on duty at...Ch. 15 - TB Worldwide, tuberculosis is the number-one cause...Ch. 15 - Earthquakes Suppose the probability of a major...Ch. 15 - Prob. 51ECh. 15 - Prob. 52ECh. 15 - Prob. 53ECh. 15 - True-false A true–false test consists of 50...Ch. 15 - Prob. 55ECh. 15 - Prob. 56ECh. 15 - Prob. 57ECh. 15 - Prob. 58ECh. 15 - Prob. 59ECh. 15 - Quality control In an effort to improve the...Ch. 15 - Prob. 61ECh. 15 - Quality control, part 2 The cell phone...
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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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