Fundamentals of Differential Equations and Boundary Value Problems
7th Edition
ISBN: 9780321977106
Author: Nagle, R. Kent
Publisher: Pearson Education, Limited
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Chapter 2.4, Problem 31E
To determine
(a)
To find:
The solution to the differential equation
To determine
(b)
To find:
The solution of the differential equation.
To determine
(c)
To find:
The solution of the differential equation.
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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?
Chapter 2 Solutions
Fundamentals of Differential Equations and Boundary Value Problems
Ch. 2.2 - Prob. 1ECh. 2.2 - In Problems 1-6, determine whether the given...Ch. 2.2 - Prob. 3ECh. 2.2 - Prob. 4ECh. 2.2 - Prob. 5ECh. 2.2 - Prob. 6ECh. 2.2 - Prob. 7ECh. 2.2 - Prob. 8ECh. 2.2 - Prob. 9ECh. 2.2 - Prob. 10E
Ch. 2.2 - Prob. 11ECh. 2.2 - Prob. 12ECh. 2.2 - Prob. 13ECh. 2.2 - Prob. 14ECh. 2.2 - Prob. 15ECh. 2.2 - Prob. 16ECh. 2.2 - Prob. 17ECh. 2.2 - Prob. 18ECh. 2.2 - Prob. 19ECh. 2.2 - Prob. 20ECh. 2.2 - Prob. 21ECh. 2.2 - Prob. 22ECh. 2.2 - Prob. 23ECh. 2.2 - Prob. 24ECh. 2.2 - Prob. 25ECh. 2.2 - Prob. 26ECh. 2.2 - Solutions Not Expressible in Terms of Elementary...Ch. 2.2 - Sketch the solution to the initial value problem...Ch. 2.2 - Prob. 29ECh. 2.2 - As stated in this section, the separation of...Ch. 2.2 - Interval of Definition. By looking at an initial...Ch. 2.2 - Analyze the solution y=(x) to the initial value...Ch. 2.2 - Prob. 33ECh. 2.2 - Prob. 34ECh. 2.2 - Prob. 35ECh. 2.2 - Prob. 36ECh. 2.2 - Prob. 37ECh. 2.2 - Prob. 38ECh. 2.2 - Prob. 39ECh. 2.2 - The atmospheric pressure force per unit area on a...Ch. 2.3 - In Problem 1-6, Determine whether the given...Ch. 2.3 - Prob. 2ECh. 2.3 - Prob. 3ECh. 2.3 - Prob. 4ECh. 2.3 - Prob. 5ECh. 2.3 - Prob. 6ECh. 2.3 - Prob. 7ECh. 2.3 - In Problems 7-16, obtain the general solution to...Ch. 2.3 - In Problems 7-16, obtain the general solution to...Ch. 2.3 - Prob. 10ECh. 2.3 - In Problems 7-16, obtain the general solution to...Ch. 2.3 - Prob. 12ECh. 2.3 - Prob. 13ECh. 2.3 - In Problems 7-16, obtain the general solution to...Ch. 2.3 - In Problems 7-16, obtain the general solution to...Ch. 2.3 - In Problems 7-16, obtain the general solution to...Ch. 2.3 - In Problems 17-22, solve the initial value...Ch. 2.3 - In Problem 17-22, solve the initial value problem....Ch. 2.3 - In Problem 17-22, solve the initial value problem....Ch. 2.3 - Prob. 20ECh. 2.3 - Prob. 21ECh. 2.3 - Prob. 22ECh. 2.3 - Prob. 23ECh. 2.3 - Prob. 24ECh. 2.3 - Prob. 25ECh. 2.3 - Prob. 26ECh. 2.3 - Constant Multiples of Solutions. a. Show that y=ex...Ch. 2.3 - Prob. 29ECh. 2.3 - Prob. 30ECh. 2.3 - Discontinuous Coefficients. As we will see in...Ch. 2.3 - Prob. 32ECh. 2.3 - Prob. 33ECh. 2.3 - Prob. 34ECh. 2.3 - Mixing Suppose a brine containing 0.2kg of salt...Ch. 2.3 - Variation of Parameters. Here is another procedure...Ch. 2.3 - Prob. 37ECh. 2.3 - Prob. 38ECh. 2.3 - The Nobel Prize in Physiology or Medicine in 1963...Ch. 2.4 - Prob. 1ECh. 2.4 - Prob. 2ECh. 2.4 - Prob. 3ECh. 2.4 - Prob. 4ECh. 2.4 - Prob. 5ECh. 2.4 - Prob. 6ECh. 2.4 - Prob. 7ECh. 2.4 - Prob. 8ECh. 2.4 - Prob. 9ECh. 2.4 - Prob. 10ECh. 2.4 - Prob. 11ECh. 2.4 - Prob. 12ECh. 2.4 - Prob. 13ECh. 2.4 - Prob. 14ECh. 2.4 - Prob. 15ECh. 2.4 - Prob. 16ECh. 2.4 - Prob. 17ECh. 2.4 - Prob. 18ECh. 2.4 - Prob. 19ECh. 2.4 - In Problems 9-20, determine whether the equation...Ch. 2.4 - Prob. 21ECh. 2.4 - Prob. 22ECh. 2.4 - Prob. 23ECh. 2.4 - Prob. 24ECh. 2.4 - Prob. 25ECh. 2.4 - Prob. 26ECh. 2.4 - Prob. 27ECh. 2.4 - Prob. 28ECh. 2.4 - Prob. 29ECh. 2.4 - Consider the equation...Ch. 2.4 - Prob. 31ECh. 2.4 - Prob. 32ECh. 2.4 - Prob. 33ECh. 2.4 - Prob. 34ECh. 2.4 - Prob. 35ECh. 2.4 - Prob. 36ECh. 2.5 - Prob. 1ECh. 2.5 - Prob. 2ECh. 2.5 - Prob. 3ECh. 2.5 - Prob. 4ECh. 2.5 - Prob. 5ECh. 2.5 - Prob. 6ECh. 2.5 - In Problems 7-12, solve the equation....Ch. 2.5 - In Problems 7-12, solve the equation....Ch. 2.5 - In Problems 7-12, solve the equation....Ch. 2.5 - In Problems 7-12, solve the equation....Ch. 2.5 - In Problems 7-12, solve the equation....Ch. 2.5 - In Problems 7-12, solve the equation....Ch. 2.5 - Prob. 13ECh. 2.5 - Prob. 14ECh. 2.5 - Prob. 15ECh. 2.5 - Prob. 16ECh. 2.5 - Prob. 17ECh. 2.5 - Prob. 18ECh. 2.5 - Prob. 19ECh. 2.5 - Prob. 20ECh. 2.6 - Prob. 1ECh. 2.6 - Prob. 2ECh. 2.6 - Prob. 3ECh. 2.6 - Prob. 4ECh. 2.6 - In Problems 1 -8, identify do not solve the...Ch. 2.6 - In Problems 1 -8, identify do not solve the...Ch. 2.6 - Prob. 7ECh. 2.6 - In Problems 1 -8, identify do not solve the...Ch. 2.6 - Prob. 9ECh. 2.6 - Use the method discussed under Homogeneous...Ch. 2.6 - Prob. 11ECh. 2.6 - Prob. 12ECh. 2.6 - Prob. 13ECh. 2.6 - Prob. 14ECh. 2.6 - Prob. 15ECh. 2.6 - Prob. 16ECh. 2.6 - Prob. 17ECh. 2.6 - Prob. 18ECh. 2.6 - Prob. 19ECh. 2.6 - Use the method discussed under Equations of the...Ch. 2.6 - Prob. 21ECh. 2.6 - Prob. 22ECh. 2.6 - Prob. 23ECh. 2.6 - Prob. 24ECh. 2.6 - Prob. 25ECh. 2.6 - Prob. 26ECh. 2.6 - Prob. 27ECh. 2.6 - Prob. 28ECh. 2.6 - Prob. 29ECh. 2.6 - Prob. 30ECh. 2.6 - Use the method discussed under Equations with...Ch. 2.6 - Use method discussed under Equation with Linear...Ch. 2.6 - Prob. 33ECh. 2.6 - Prob. 34ECh. 2.6 - Prob. 35ECh. 2.6 - Prob. 36ECh. 2.6 - Prob. 37ECh. 2.6 - Prob. 38ECh. 2.6 - Prob. 39ECh. 2.6 - Prob. 40ECh. 2.6 - Prob. 41ECh. 2.6 - Prob. 42ECh. 2.6 - Prob. 43ECh. 2.6 - Prob. 44ECh. 2.6 - Prob. 45ECh. 2.6 - Prob. 46ECh. 2.6 - Prob. 47ECh. 2.6 - Prob. 48ECh. 2.RP - Prob. 1RPCh. 2.RP - Prob. 2RPCh. 2.RP - Prob. 3RPCh. 2.RP - Prob. 4RPCh. 2.RP - Prob. 5RPCh. 2.RP - Prob. 6RPCh. 2.RP - Prob. 7RPCh. 2.RP - Prob. 8RPCh. 2.RP - Prob. 9RPCh. 2.RP - Prob. 10RPCh. 2.RP - Prob. 11RPCh. 2.RP - Prob. 12RPCh. 2.RP - Prob. 13RPCh. 2.RP - Prob. 14RPCh. 2.RP - Prob. 15RPCh. 2.RP - Prob. 16RPCh. 2.RP - Prob. 17RPCh. 2.RP - Prob. 18RPCh. 2.RP - Prob. 19RPCh. 2.RP - Prob. 20RPCh. 2.RP - Prob. 21RPCh. 2.RP - In Problem 1-30, solve the equation....Ch. 2.RP - Prob. 23RPCh. 2.RP - Prob. 24RPCh. 2.RP - Prob. 25RPCh. 2.RP - Prob. 26RPCh. 2.RP - In Problems 1-30, solve the equation....Ch. 2.RP - Prob. 28RPCh. 2.RP - Prob. 29RPCh. 2.RP - Prob. 30RPCh. 2.RP - Prob. 31RPCh. 2.RP - Prob. 32RPCh. 2.RP - In Problems 31-40, solve the initial value problem...Ch. 2.RP - Prob. 34RPCh. 2.RP - Prob. 35RPCh. 2.RP - Prob. 36RPCh. 2.RP - Prob. 37RPCh. 2.RP - Prob. 38RPCh. 2.RP - Prob. 39RPCh. 2.RP - Prob. 40RPCh. 2.RP - Prob. 41RP
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