Pathways to Math Literacy (Loose Leaf)
1st Edition
ISBN: 9781259218859
Author: David Sobecki Professor, Brian A. Mercer
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 2.5, Problem 1C
What is a variable?
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We consider an N-period CRR model where each period is 1 year (At = 1), the up factor is
u = 0.1, the down factor is d = e−0.3 and r = 0. We remind you that in the CRR model, the
stock price at time tn is modeled (under P) by
Sta
=
So exp (μtn + σ√AtZn),
where (Zn) is a simple symmetric random walk.
(a) Find the parameters μ and σ for the CRR model described above.
(b) Find P
Ste
So
55/50
€ > 1).
StN
(c) Find lim P
804-N
(d) Determine q. (You can use e- 1 x.)
Ste
(e) Find Q
So
(f) Find lim Q
004-N
StN
So
In this problem, we consider a 3-period stock market model with evolution given in Fig. 1 below.
Each period corresponds to one year. The interest rate is r = 0%.
16
22
28
12
16
12
8
4
2
time
Figure 1: Stock evolution for Problem 1.
(a) A colleague notices that in the model above, a movement up-down leads to the same value
as a movement down-up. He concludes that the model is a CRR model. Is your colleague
correct? (Explain your answer.)
(b) We consider a European put with strike price K = 10 and expiration T = 3 years. Find
the price of this option at time 0. Provide the replicating portfolio for the first period.
(c) In addition to the call above, we also consider a European call with strike price K = 10
and expiration T = 3 years. Which one has the highest price? (It is not necessary to
provide the price of the call.)
(d) We now assume a yearly interest rate r = 25%. We consider a Bermudan put option with
strike price K = 10. It works like a standard put, but you can exercise it…
In this problem, we consider a 2-period stock market model with evolution given in Fig. 1 below.
Each period corresponds to one year (At = 1). The yearly interest rate is r = 1/3 = 33%. This
model is a CRR model.
25
15
9
10
6
4
time
Figure 1: Stock evolution for Problem 1.
(a) Find the values of up and down factors u and d, and the risk-neutral probability q.
(b) We consider a European put with strike price K
the price of this option at time 0.
==
16 and expiration T = 2 years. Find
(c) Provide the number of shares of stock that the replicating portfolio contains at each pos-
sible position.
(d) You find this option available on the market for $2. What do you do? (Short answer.)
(e) We consider an American put with strike price K
= 16 and expiration T
=
2 years. Find
the price of this option at time 0 and describe the optimal exercising strategy.
(f) We consider an American call with strike price K ○ = 16 and expiration T = 2 years. Find
the price of this option at time 0 and describe…
Chapter 2 Solutions
Pathways to Math Literacy (Loose Leaf)
Ch. 2.1 - Prob. 0LOCh. 2.1 - Prob. 1GCh. 2.1 - Prob. 2GCh. 2.1 - Prob. 3GCh. 2.1 - Prob. 4GCh. 2.1 - Prob. 5GCh. 2.1 - Prob. 6GCh. 2.1 - Prob. 7GCh. 2.1 - Prob. 8GCh. 2.1 - Prob. 9G
Ch. 2.1 - Prob. 10GCh. 2.1 - Prob. 11GCh. 2.1 - Prob. 12GCh. 2.1 - Prob. 13GCh. 2.1 - Prob. 14GCh. 2.1 - Prob. 15GCh. 2.1 - Prob. 1CCh. 2.1 - Prob. 2CCh. 2.1 - Prob. 3CCh. 2.1 - Prob. 4CCh. 2.1 - Prob. 5CCh. 2.1 - In many cases, you can use the results of existing...Ch. 2.1 - In many cases, you can use the results of existing...Ch. 2.1 - In many cases, you can use the results of existing...Ch. 2.1 - Prob. 9CCh. 2.1 - Prob. 1RCh. 2.1 - Prob. 2RCh. 2.1 - Prob. 1ACh. 2.1 - Prob. 2ACh. 2.1 - Prob. 3ACh. 2.1 - Prob. 4ACh. 2.1 - Prob. 5ACh. 2.2 - Prob. 0LOCh. 2.2 - Prob. 2GCh. 2.2 - The best gift I got for my birthday last year was...Ch. 2.2 - Prob. 4GCh. 2.2 - Prob. 5GCh. 2.2 - Prob. 6GCh. 2.2 - Prob. 1CCh. 2.2 - Prob. 2CCh. 2.2 - Prob. 3CCh. 2.2 - Prob. 4CCh. 2.2 - Prob. 5CCh. 2.2 - Prob. 6CCh. 2.2 - Prob. 7CCh. 2.2 - Prob. 8CCh. 2.2 - Prob. 9CCh. 2.2 - Prob. 10CCh. 2.2 - Prob. 11CCh. 2.2 - Forensic scientists often examine scaled-up crime...Ch. 2.2 - In the 1984 movie Ghostbusters, a 112.5-foot-tall...Ch. 2.2 - Prob. 3ACh. 2.2 - Prob. 4ACh. 2.2 - Prob. 5ACh. 2.2 - Prob. 6ACh. 2.2 - Prob. 7ACh. 2.2 - For Questions 69, use dimensional analysis with...Ch. 2.2 - For Questions 69, use dimensional analysis with...Ch. 2.3 - Prob. 0LOCh. 2.3 - Prob. 1CCh. 2.3 - Prob. 2CCh. 2.3 - Prob. 3CCh. 2.3 - Prob. 1GCh. 2.3 - Prob. 2GCh. 2.3 - Prob. 3GCh. 2.3 - Prob. 4GCh. 2.3 - Prob. 5GCh. 2.3 - Prob. 6GCh. 2.3 - Prob. 7GCh. 2.3 - Prob. 8GCh. 2.3 - Prob. 9GCh. 2.3 - Prob. 10GCh. 2.3 - Prob. 11GCh. 2.3 - Prob. 12GCh. 2.3 - Prob. 13GCh. 2.3 - Prob. 14GCh. 2.3 - Prob. 15GCh. 2.3 - Prob. 16GCh. 2.3 - Prob. 1ACh. 2.3 - Prob. 2ACh. 2.3 - Prob. 3ACh. 2.3 - Prob. 4ACh. 2.3 - Use your answer to Question 3 and dimensional...Ch. 2.3 - Prob. 6ACh. 2.3 - Prob. 7ACh. 2.3 - Glaciers are large masses of ice that flow like...Ch. 2.3 - Prob. 9ACh. 2.3 - Prob. 10ACh. 2.4 - After reading the opening paragraph, what do you...Ch. 2.4 - Prob. 1CCh. 2.4 - Prob. 2CCh. 2.4 - When asked to compare the sizes of two numbers,...Ch. 2.4 - Prob. 4CCh. 2.4 - Prob. 5CCh. 2.4 - Prob. 1GCh. 2.4 - Prob. 2GCh. 2.4 - Prob. 3GCh. 2.4 - Prob. 4GCh. 2.4 - Prob. 5GCh. 2.4 - Prob. 6GCh. 2.4 - Prob. 7GCh. 2.4 - Prob. 8GCh. 2.4 - Prob. 9GCh. 2.4 - Prob. 10GCh. 2.4 - Name...Ch. 2.4 - Name...Ch. 2.4 - Name...Ch. 2.4 - Prob. 4ACh. 2.4 - Prob. 5ACh. 2.4 - Prob. 6ACh. 2.5 - Prob. 0LOCh. 2.5 - What is a variable?Ch. 2.5 - Prob. 2CCh. 2.5 - Consider the following relationships, where one...Ch. 2.5 - If we wanted to know the cost of a 7-mile cab...Ch. 2.5 - Evaluate the cost formula for m=4, then attach...Ch. 2.5 - Prob. 4GCh. 2.5 - Prob. 5GCh. 2.5 - Prob. 6GCh. 2.5 - Prob. 7GCh. 2.5 - Prob. 8GCh. 2.5 - Prob. 9GCh. 2.5 - Prob. 10GCh. 2.5 - Prob. 11GCh. 2.5 - Next, were going to look at how the types of...Ch. 2.5 - Prob. 13GCh. 2.5 - Prob. 14GCh. 2.5 - Prob. 15GCh. 2.5 - Prob. 16GCh. 2.5 - Type a short answer to each question. What is a...Ch. 2.5 - Type a short answer to each question. When two...Ch. 2.5 - Type a short answer to each question. Describe the...Ch. 2.5 - Type a short answer to each question. How do the...Ch. 2.5 - Prob. 1ACh. 2.5 - Prob. 2ACh. 2.5 - Prob. 3ACh. 2.5 - Prob. 4ACh. 2.5 - Prob. 5ACh. 2.5 - Use the spreadsheet on page 122 to answer the...Ch. 2.5 - Prob. 7ACh. 2.5 - Prob. 8ACh. 2.6 - Prob. 0LOCh. 2.6 - Prob. 1GCh. 2.6 - Prob. 2GCh. 2.6 - Prob. 3GCh. 2.6 - Prob. 4GCh. 2.6 - Prob. 5GCh. 2.6 - Prob. 6GCh. 2.6 - Prob. 7GCh. 2.6 - Prob. 8GCh. 2.6 - Prob. 9GCh. 2.6 - Prob. 10GCh. 2.6 - Prob. 1CCh. 2.6 - Prob. 2CCh. 2.6 - Prob. 3CCh. 2.6 - Prob. 4CCh. 2.6 - This is where deductive reasoning comes into play....Ch. 2.6 - Pretend that youre one of the nine justices: how...Ch. 2.6 - Prob. 8CCh. 2.6 - Prob. 9CCh. 2.6 - Prob. 10CCh. 2.6 - Prob. 11CCh. 2.6 - Prob. 12CCh. 2.6 - Prob. 13CCh. 2.6 - Prob. 14CCh. 2.6 - Prob. 15CCh. 2.6 - Prob. 1ACh. 2.6 - Prob. 2ACh. 2.6 - Prob. 3ACh. 2.6 - Prob. 4ACh. 2.6 - Prob. 5ACh. 2.6 - Prob. 6ACh. 2.6 - Prob. 7ACh. 2.6 - Prob. 8ACh. 2.6 - Prob. 9ACh. 2.6 - Prob. 10ACh. 2.7 - After reading the opening paragraph, what do you...Ch. 2.7 - Prob. 1CCh. 2.7 - Prob. 2CCh. 2.7 - When an average-sized person walks at a fairly...Ch. 2.7 - Prob. 1GCh. 2.7 - Prob. 2GCh. 2.7 - Prob. 3GCh. 2.7 - Prob. 4GCh. 2.7 - Prob. 1ACh. 2.7 - Prob. 2ACh. 2.7 - Prob. 3ACh. 2.7 - Prob. 4ACh. 2.8 - Prob. 0LOCh. 2.8 - Prob. 1CCh. 2.8 - Prob. 2CCh. 2.8 - Prob. 1GCh. 2.8 - Prob. 2GCh. 2.8 - Prob. 3GCh. 2.8 - Prob. 4GCh. 2.8 - Prob. 5GCh. 2.8 - Prob. 6GCh. 2.8 - Prob. 7GCh. 2.8 - Prob. 8GCh. 2.8 - Prob. 9GCh. 2.8 - Prob. 10GCh. 2.8 - Prob. 11GCh. 2.8 - Prob. 12GCh. 2.8 - Prob. 1ACh. 2.8 - Prob. 2ACh. 2.8 - Prob. 3ACh. 2.8 - Prob. 4ACh. 2.8 - Prob. 5ACh. 2.8 - Prob. 6ACh. 2.8 - Prob. 7ACh. 2.8 - Prob. 8ACh. 2.8 - Prob. 9ACh. 2.8 - The two tables below display the charges for two...Ch. 2.9 - After reading the opening paragraph, what do you...Ch. 2.9 - Prob. 1GCh. 2.9 - Prob. 2GCh. 2.9 - Prob. 3GCh. 2.9 - Prob. 4GCh. 2.9 - Prob. 5GCh. 2.9 - Prob. 6GCh. 2.9 - We know that the equation 1 min =60 sec is true....Ch. 2.9 - Prob. 8GCh. 2.9 - Prob. 9GCh. 2.9 - Prob. 10GCh. 2.9 - Prob. 11GCh. 2.9 - Prob. 12GCh. 2.9 - Prob. 13GCh. 2.9 - Prob. 14GCh. 2.9 - Prob. 15GCh. 2.9 - Prob. 16GCh. 2.9 - Prob. 17GCh. 2.9 - Prob. 18GCh. 2.9 - Prob. 19GCh. 2.9 - In Group Question 4 of Lesson 1-2, we found that...Ch. 2.9 - Prob. 21GCh. 2.9 - Prob. 22GCh. 2.9 - In the Group portion of Lesson 2-8, you were asked...Ch. 2.9 - Prob. 24GCh. 2.9 - Prob. 25GCh. 2.9 - Prob. 26GCh. 2.9 - Prob. 27GCh. 2.9 - Prob. 28GCh. 2.9 - Prob. 29GCh. 2.9 - Prob. 30GCh. 2.9 - Prob. 31GCh. 2.9 - Prob. 32GCh. 2.9 - Prob. 33GCh. 2.9 - Prob. 34GCh. 2.9 - Prob. 35GCh. 2.9 - Prob. 37GCh. 2.9 - Prob. 38GCh. 2.9 - Prob. 39GCh. 2.9 - Prob. 40GCh. 2.9 - Prob. 1ACh. 2.9 - Prob. 2ACh. 2.9 - Prob. 3ACh. 2.9 - Prob. 4ACh. 2.9 - Prob. 5ACh. 2.9 - Prob. 6ACh. 2.9 - From Lesson 2-7 Group Question 4: 1,000+50x=4,500...Ch. 2.9 - Prob. 8ACh. 2.9 - Prob. 9ACh. 2.9 - Prob. 10ACh. 2.9 - Prob. 11ACh. 2.9 - Prob. 12ACh. 2.9 - Prob. 13A
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