Intro Stats, Books a la Carte Edition (5th Edition)
5th Edition
ISBN: 9780134210285
Author: Richard D. De Veaux, Paul Velleman, David E. Bock
Publisher: PEARSON
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Chapter 16, Problem 39E
a.
To determine
Explain whether the test is upper-tailed or lower-tailed test.
b.
To determine
Explain the type-I error in this context.
c.
To determine
Explain the type-II error in this context.
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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.)
Chapter 16 Solutions
Intro Stats, Books a la Carte Edition (5th Edition)
Ch. 16.2 - An experiment to test the fairness of a roulette...Ch. 16.2 - Prob. 2JCCh. 16.2 - Prob. 3JCCh. 16.3 - Prob. 4JCCh. 16.3 - Prob. 5JCCh. 16.3 - Prob. 6JCCh. 16.3 - Prob. 7JCCh. 16.4 - Remember the bank thats sending out DVDs to try to...Ch. 16.4 - Prob. 9JCCh. 16.4 - For the bank, which situation has higher power: a...
Ch. 16 - True or false Which of the following are true? If...Ch. 16 - False or true Which of the following are true? If...Ch. 16 - P-values Which of the following are true? If...Ch. 16 - Prob. 4ECh. 16 - Prob. 5ECh. 16 - Prob. 6ECh. 16 - Prob. 7ECh. 16 - More critical values For each of the following...Ch. 16 - Prob. 9ECh. 16 - Significant again? A new reading program may...Ch. 16 - SECTION 16.4 11. Errors For each of the following...Ch. 16 - More errors For each of the following situations,...Ch. 16 - CHAPTER EXERCISES 13. P-value A medical researcher...Ch. 16 - Prob. 14ECh. 16 - Alpha A researcher developing scanners to search...Ch. 16 - Prob. 16ECh. 16 - Prob. 17ECh. 16 - Is the Euro fair? Soon after the Euro was...Ch. 16 - Prob. 19ECh. 16 - Prob. 20ECh. 16 - Prob. 21ECh. 16 - Prob. 22ECh. 16 - Prob. 23ECh. 16 - Prob. 24ECh. 16 - Prob. 25ECh. 16 - Prob. 26ECh. 16 - Prob. 27ECh. 16 - Alzheimers Testing for Alzheimers disease can be a...Ch. 16 - Prob. 29ECh. 16 - Quality control Production managers on an assembly...Ch. 16 - Cars, again As in Exercise 29, state regulators...Ch. 16 - Prob. 32ECh. 16 - Equal opportunity? A company is sued for job...Ch. 16 - Stop signs Highway safety engineers test new road...Ch. 16 - Prob. 35ECh. 16 - Ads A company is willing to renew its advertising...Ch. 16 - Prob. 37ECh. 16 - Prob. 38ECh. 16 - Prob. 39ECh. 16 - Catheters During an angiogram, heart problems can...Ch. 16 - Prob. 41ECh. 16 - Prob. 42ECh. 16 - Prob. 43ECh. 16 - Faulty or not? You are in charge of shipping...Ch. 16 - Prob. 45ECh. 16 - Prob. 46ECh. 16 - Prob. 47ECh. 16 - Prob. 48E
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