Finite Mathematics, Books a la Carte Plus MyLab Math Access Card Package (11th Edition)
11th Edition
ISBN: 9780133886818
Author: Margaret L. Lial, Raymond N. Greenwell, Nathan P. Ritchey
Publisher: PEARSON
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Textbook Question
Chapter 3.1, Problem 9E
Graph each linear inequality.
x + 3y ≥ –2
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We consider a 4-dimensional stock price model given (under P) by
dẴ₁ = µ· Xt dt + йt · ΣdŴt
where (W) is an n-dimensional Brownian motion,
π = (0.02, 0.01, -0.02, 0.05),
0.2
0
0
0
0.3
0.4
0
0
Σ=
-0.1
-4a За
0
0.2
0.4 -0.1 0.2)
and a E R. We assume that ☑0 = (1, 1, 1, 1) and that the interest rate on the market is r = 0.02.
(a) Give a condition on a that would make stock #3 be the one with largest volatility.
(b) Find the diversification coefficient for this portfolio as a function of a.
(c) Determine the maximum diversification coefficient d that you could reach by varying the
value of a?
2
Question 1. Your manager asks you to explain why the Black-Scholes model may be inappro-
priate for pricing options in practice. Give one reason that would substantiate this claim?
Question 2. We consider stock #1 and stock #2 in the model of Problem 2. Your manager
asks you to pick only one of them to invest in based on the model provided. Which one do you
choose and why ?
Question 3. Let (St) to be an asset modeled by the Black-Scholes SDE. Let Ft be the price
at time t of a European put with maturity T and strike price K. Then, the discounted option
price process (ert Ft) t20 is a martingale. True or False? (Explain your answer.)
Question 4. You are considering pricing an American put option using a Black-Scholes model
for the underlying stock. An explicit formula for the price doesn't exist. In just a few words (no
more than 2 sentences), explain how you would proceed to price it.
Question 5. We model a short rate with a Ho-Lee model drt = ln(1+t) dt +2dWt. Then the
interest rate…
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 3 Solutions
Finite Mathematics, Books a la Carte Plus MyLab Math Access Card Package (11th Edition)
Ch. 3.1 - Graph each linear inequality. x + y 2Ch. 3.1 - Graph each linear inequality. y x + 1Ch. 3.1 - Graph each linear inequality. x 2 yCh. 3.1 - Graph each linear inequality. y x 3Ch. 3.1 - Graph each linear inequality. 4x y 6Ch. 3.1 - Graph each linear inequality. 4y + x 6Ch. 3.1 - Graph each linear inequality. 7. 4x + y 8Ch. 3.1 - Graph each linear inequality. 2x y 2Ch. 3.1 - Graph each linear inequality. x + 3y 2Ch. 3.1 - Graph each linear inequality. 2x + 3y 6
Ch. 3.1 - Graph each linear inequality. x 3yCh. 3.1 - Graph each linear inequality. 2x yCh. 3.1 - Graph each linear inequality. x + y 0Ch. 3.1 - Graph each linear inequality. 3x + 2y 0Ch. 3.1 - Graph each linear inequality. y xCh. 3.1 - Graph each linear inequality. y 5xCh. 3.1 - Graph each linear inequality. x 4Ch. 3.1 - Graph each linear inequality. y 5Ch. 3.1 - Graph each linear inequality. y 2Ch. 3.1 - Graph each linear inequality. x 4Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Graph the feasible region for each system of...Ch. 3.1 - Prob. 35ECh. 3.1 - Prob. 36ECh. 3.1 - Prob. 37ECh. 3.1 - Prob. 38ECh. 3.1 - The regions A through G in the figure can be...Ch. 3.1 - Production Scheduling A small pottery shop makes...Ch. 3.1 - Time Management Carmella and Walt produce handmade...Ch. 3.1 - Prob. 42ECh. 3.1 - Prob. 43ECh. 3.1 - Prob. 44ECh. 3.1 - For Exercises 42-47, perform the following steps....Ch. 3.1 - Prob. 46ECh. 3.1 - Prob. 47ECh. 3.2 - The following graphs show regions of feasible...Ch. 3.2 - The following graphs show regions of feasible...Ch. 3.2 - The following graphs show regions of feasible...Ch. 3.2 - The following graphs show regions of feasible...Ch. 3.2 - The following graphs show regions of feasible...Ch. 3.2 - Prob. 6ECh. 3.2 - Prob. 7ECh. 3.2 - Use graphical methods to solve each linear...Ch. 3.2 - Prob. 9ECh. 3.2 - Use graphical methods to solve each linear...Ch. 3.2 - Prob. 11ECh. 3.2 - Prob. 12ECh. 3.2 - Prob. 13ECh. 3.2 - Prob. 14ECh. 3.2 - Prob. 15ECh. 3.2 - Use graphical methods to solve each linear...Ch. 3.2 - Use graphical methods to solve each linear...Ch. 3.3 - Write Exercises 16 as linear inequalities....Ch. 3.3 - Prob. 2ECh. 3.3 - Prob. 3ECh. 3.3 - Prob. 4ECh. 3.3 - Prob. 5ECh. 3.3 - Prob. 6ECh. 3.3 - Transportation The Miers Company produces small...Ch. 3.3 - Transportation A manufacturer of refrigerators...Ch. 3.3 - Finance A pension fund manager decides to invest a...Ch. 3.3 - Profit A small country can grow only two crops for...Ch. 3.3 - Prob. 11ECh. 3.3 - Revenue A candy company has 150 kg of...Ch. 3.3 - Blending The Mostpure Milk Company gets milk from...Ch. 3.3 - Profit The Muro Manufacturing Company makes two...Ch. 3.3 - Prob. 15ECh. 3.3 - Revenue The manufacturing process requires that...Ch. 3.3 - Prob. 17ECh. 3.3 - Manufacturing (Note: Exercises #x2013;20 are from...Ch. 3.3 - Prob. 19ECh. 3.3 - Prob. 20ECh. 3.3 - Life Sciences Health Care David Willis takes...Ch. 3.3 - Prob. 22ECh. 3.3 - Nutrition A dietician is planning a snack package...Ch. 3.3 - Prob. 24ECh. 3.3 - Anthropology An anthropology article presents a...Ch. 3.3 - Prob. 26ECh. 3.3 - Prob. 27ECh. 3 - Use sensitivity analysis to find the optimal...Ch. 3 - Prob. 2EACh. 3 - Prob. 3EACh. 3 - Prob. 4EACh. 3 - Prob. 5EACh. 3 - Prob. 1RECh. 3 - Prob. 2RECh. 3 - Prob. 3RECh. 3 - Prob. 4RECh. 3 - Prob. 5RECh. 3 - Prob. 6RECh. 3 - Prob. 7RECh. 3 - Prob. 8RECh. 3 - Prob. 9RECh. 3 - Prob. 10RECh. 3 - Prob. 11RECh. 3 - Prob. 12RECh. 3 - Prob. 13RECh. 3 - How many constraints are we limited to in the...Ch. 3 - Prob. 15RECh. 3 - Prob. 16RECh. 3 - Prob. 17RECh. 3 - Prob. 18RECh. 3 - Prob. 19RECh. 3 - Prob. 20RECh. 3 - Prob. 21RECh. 3 - Prob. 22RECh. 3 - Prob. 23RECh. 3 - Prob. 24RECh. 3 - Prob. 25RECh. 3 - Prob. 26RECh. 3 - Prob. 27RECh. 3 - Use the given regions to find the maximum and...Ch. 3 - Prob. 29RECh. 3 - Prob. 30RECh. 3 - Prob. 31RECh. 3 - Prob. 32RECh. 3 - Prob. 33RECh. 3 - Prob. 34RECh. 3 - Prob. 35RECh. 3 - Prob. 36RECh. 3 - Prob. 37RECh. 3 - Cost Analysis DeMarco's pizza shop makes two...Ch. 3 - Prob. 39RECh. 3 - Revenue How many pizzas of each kind should the...Ch. 3 - Prob. 41RECh. 3 - Prob. 42RECh. 3 - Steel A steel company produces two types of...Ch. 3 - Prob. 44RECh. 3 - Prob. 45RECh. 3 - Prob. 46RE
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