Mathematics: A Discrete Introduction
3rd Edition
ISBN: 9780840049421
Author: Edward A. Scheinerman
Publisher: Cengage Learning
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Chapter 2.10, Problem 10.10E
Let
Prove that
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Construct a know-show table for each statement below that appears to be true.
Problem 3. Pricing a multi-stock option the Margrabe formula
The purpose of this problem is to price a swap option in a 2-stock model, similarly as
what we did in the example in the lectures. We consider a two-dimensional Brownian
motion given by W₁ = (W(¹), W(2)) on a probability space (Q, F,P). Two stock prices
are modeled by the following equations:
dX
=
dY₁ =
X₁ (rdt+
rdt+0₁dW!)
(²)),
Y₁ (rdt+dW+0zdW!"),
with Xo
xo and Yo =yo. This corresponds to the multi-stock model studied in class,
but with notation (X+, Y₁) instead of (S(1), S(2)). Given the model above, the measure
P is already the risk-neutral measure (Both stocks have rate of return r). We write
σ = 0₁+0%. We consider a swap option, which gives you the right, at time T, to
exchange one share of X for one share of Y. That is, the option has payoff
F=(Yr-XT).
(a) We first assume that r = 0 (for questions (a)-(f)). Write an explicit expression for
the process Xt.
Reminder before proceeding to question (b): Girsanov's theorem…
Problem 1. Multi-stock model
We consider a 2-stock model similar to the one studied in class. Namely, we consider
=
S(1)
S(2)
=
S(¹) exp (σ1B(1) + (M1 - 0/1 )
S(²) exp (02B(2) + (H₂-
M2
where (B(¹) ) +20 and (B(2) ) +≥o are two Brownian motions, with
t≥0
Cov (B(¹), B(2)) = p min{t, s}.
"
The purpose of this problem is to prove that there indeed exists a 2-dimensional Brownian
motion (W+)+20 (W(1), W(2))+20 such that
=
S(1)
S(2)
=
=
S(¹) exp (011W(¹) + (μ₁ - 01/1) t)
롱)
S(²) exp (021W (1) + 022W(2) + (112 - 03/01/12) t).
where σ11, 21, 22 are constants to be determined (as functions of σ1, σ2, p).
Hint: The constants will follow the formulas developed in the lectures.
(a) To show existence of (Ŵ+), first write the expression for both W. (¹) and W (2)
functions of (B(1), B(²)).
as
(b) Using the formulas obtained in (a), show that the process (WA) is actually a 2-
dimensional standard Brownian motion (i.e. show that each component is normal,
with mean 0, variance t, and that their…
Chapter 2 Solutions
Mathematics: A Discrete Introduction
Ch. 2.8 - Write out all the possible two-letter words one...Ch. 2.8 - Airports have names, but they also have...Ch. 2.8 - Prob. 8.3ECh. 2.8 - Prob. 8.4ECh. 2.8 - Prob. 8.5ECh. 2.8 - Prob. 8.6ECh. 2.8 - Prob. 8.7ECh. 2.8 - Prob. 8.8ECh. 2.8 - Prob. 8.9ECh. 2.8 - Prob. 8.10E
Ch. 2.8 - Prob. 8.11ECh. 2.8 - Prob. 8.12ECh. 2.8 - Prob. 8.13ECh. 2.8 - Prob. 8.14ECh. 2.8 - Prob. 8.15ECh. 2.8 - Prob. 8.16ECh. 2.8 - Prob. 8.17ECh. 2.8 - Prob. 8.18ECh. 2.8 - Prob. 8.19ECh. 2.9 - Prob. 9.1ECh. 2.9 - Prob. 9.2ECh. 2.9 - Prob. 9.3ECh. 2.9 - Prob. 9.4ECh. 2.9 - Prob. 9.5ECh. 2.9 - Prob. 9.6ECh. 2.9 - Prob. 9.7ECh. 2.9 - Prob. 9.8ECh. 2.9 - Prob. 9.9ECh. 2.9 - Prob. 9.10ECh. 2.9 - Prob. 9.11ECh. 2.9 - Prob. 9.12ECh. 2.9 - Prob. 9.13ECh. 2.9 - Prob. 9.14ECh. 2.9 - Prob. 9.15ECh. 2.9 - Prob. 9.16ECh. 2.9 - Prob. 9.17ECh. 2.9 - Prob. 9.18ECh. 2.10 - Prob. 10.1ECh. 2.10 - Prob. 10.2ECh. 2.10 - Prob. 10.3ECh. 2.10 - Prob. 10.4ECh. 2.10 - Prob. 10.5ECh. 2.10 - Prob. 10.6ECh. 2.10 - Prob. 10.7ECh. 2.10 - Prob. 10.8ECh. 2.10 - Prob. 10.9ECh. 2.10 - Let A=x:4x and let B=x:2x. Prove that AB.Ch. 2.10 - Prob. 10.11ECh. 2.10 - Prob. 10.12ECh. 2.10 - Prob. 10.13ECh. 2.10 - Prob. 10.14ECh. 2.10 - Prob. 10.15ECh. 2.11 - Write the following sentences using the quantifier...Ch. 2.11 - Prob. 11.2ECh. 2.11 - Prob. 11.3ECh. 2.11 - Prob. 11.4ECh. 2.11 - Prob. 11.5ECh. 2.11 - Prob. 11.6ECh. 2.11 - Prob. 11.7ECh. 2.11 - Prob. 11.8ECh. 2.12 - Prob. 12.1ECh. 2.12 - Prob. 12.2ECh. 2.12 - Prob. 12.3ECh. 2.12 - Prob. 12.4ECh. 2.12 - Prob. 12.5ECh. 2.12 - Prob. 12.6ECh. 2.12 - Prob. 12.7ECh. 2.12 - Prob. 12.8ECh. 2.12 - Prob. 12.9ECh. 2.12 - Prob. 12.10ECh. 2.12 - Prob. 12.11ECh. 2.12 - Prob. 12.12ECh. 2.12 - Prob. 12.13ECh. 2.12 - Prob. 12.14ECh. 2.12 - Prob. 12.15ECh. 2.12 - Prob. 12.16ECh. 2.12 - Prob. 12.17ECh. 2.12 - Prob. 12.18ECh. 2.12 - Prob. 12.19ECh. 2.12 - Prob. 12.20ECh. 2.12 - Prob. 12.21ECh. 2.12 - Prob. 12.22ECh. 2.12 - Prob. 12.23ECh. 2.12 - Prob. 12.24ECh. 2.12 - Prob. 12.25ECh. 2.12 - Prob. 12.26ECh. 2.12 - Prob. 12.27ECh. 2.12 - Prob. 12.28ECh. 2.12 - Prob. 12.29ECh. 2.12 - Prob. 12.30ECh. 2.13 - Prob. 13.1ECh. 2.13 - Prob. 13.2ECh. 2.13 - Prob. 13.3ECh. 2.13 - Prob. 13.4ECh. 2.13 - Prob. 13.5ECh. 2.13 - Prob. 13.6ECh. 2.13 - Prob. 13.7ECh. 2 - Prob. 1STCh. 2 - Prob. 2STCh. 2 - Prob. 3STCh. 2 - Prob. 4STCh. 2 - Prob. 5STCh. 2 - Prob. 6STCh. 2 - Prob. 7STCh. 2 - Prob. 8STCh. 2 - Prob. 9STCh. 2 - Prob. 10STCh. 2 - Prob. 11STCh. 2 - Prob. 12STCh. 2 - Prob. 13STCh. 2 - Prob. 14STCh. 2 - Prob. 15STCh. 2 - Prob. 16STCh. 2 - Prob. 17STCh. 2 - Prob. 18STCh. 2 - Prob. 19STCh. 2 - Prob. 20ST
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