
Introductory Statistics
1st Edition
ISBN: 9781938168208
Author: Barbara Illowsky, Susan Dean
Publisher: OpenStax College
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Textbook Question
Chapter 3, Problem 108H
Use the information in the Table 3.19 to answer the next eight exercises. The cable shows the political party affiliation of each of 67 members of the US Senate In June 2012. and when they are up f reelection.
108. The
a. mutually exclusive.
b. independent.
c. both mutually exclusive and independent.
d. neither mutually exclusive nor independent.
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Several markets (Japan, Switzerland) introduced negative interest rates on their money market.
In this problem, we will consider an annual interest rate r < 0. We consider a stock modeled
by an N-period CRR model where each period is 1 year (At = 1) and the up and down factors
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(a) We consider an American put option with strike price K and expiration T. Prove that if
<0, the optimal strategy is to wait until expiration T to exercise.
We consider an N-period CRR model where each period is 1 year (At = 1), the up factor is
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stock price at time tn is modeled (under P) by
Sta
=
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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
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(d) Determine q. (You can use e- 1 x.)
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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…
Chapter 3 Solutions
Introductory Statistics
Ch. 3 - The sample space S Is all the ordered pairs of two...Ch. 3 - You have a fair. well-shuffled deck of 52 cards....Ch. 3 - You have a fair, well-shuffled deck of 52 cards....Ch. 3 - Draw two cards from a standard 52-card deck with...Ch. 3 - A box has two balls, one white and one red. We...Ch. 3 - Let event A = learning Spanish. Let event B =...Ch. 3 - In a bag, there are six red marbles and four green...Ch. 3 - A student goes to the library. Let events B = the...Ch. 3 - In a basketball arena, • 70% of the fans are...Ch. 3 - Mark Is deciding which route to take to work. His...
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