Mathematics: A Discrete Introduction
3rd Edition
ISBN: 9780840049421
Author: Edward A. Scheinerman
Publisher: Cengage Learning
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Chapter 3.17, Problem 17.1E
a.
To determine
The value of
b.
To determine
The value of
c.
To determine
The value of
d.
To determine
The value of
e.
To determine
The value of
f.
To determine
The value of
g.
To determine
The value of
h.
To determine
The value of
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Students have asked these similar questions
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
Mathematics: A Discrete Introduction
Ch. 3.14 - Write the following relations on the set 1,2,3,4,5...Ch. 3.14 - Prob. 14.2ECh. 3.14 - Prob. 14.3ECh. 3.14 - For each of the following relations on the set of...Ch. 3.14 - Prob. 14.5ECh. 3.14 - Prob. 14.6ECh. 3.14 - Prob. 14.7ECh. 3.14 - Prob. 14.8ECh. 3.14 - Prob. 14.9ECh. 3.14 - Prob. 14.10E
Ch. 3.14 - Prob. 14.11ECh. 3.14 - Prob. 14.12ECh. 3.14 - Prob. 14.13ECh. 3.14 - Prob. 14.14ECh. 3.14 - Prove: A relation R on a set A is antisymmetric if...Ch. 3.14 - Give an example of a relation on a set that is...Ch. 3.14 - Drawing pictures of relations. Pictures of...Ch. 3.15 - Prob. 15.1ECh. 3.15 - Prob. 15.2ECh. 3.15 - Prob. 15.3ECh. 3.15 - Prob. 15.4ECh. 3.15 - Prove: If a is an integer, then aa (mod 2).Ch. 3.15 - Prob. 15.6ECh. 3.15 - For each equivalence relation below, find the...Ch. 3.15 - Prob. 15.8ECh. 3.15 - Prob. 15.9ECh. 3.15 - Prob. 15.10ECh. 3.15 - Suppose R is an equivalence relation on a set A...Ch. 3.15 - Prob. 15.12ECh. 3.15 - Prob. 15.13ECh. 3.15 - Prob. 15.14ECh. 3.15 - Prob. 15.15ECh. 3.15 - Prob. 15.16ECh. 3.15 - Prob. 15.17ECh. 3.16 - Prob. 16.1ECh. 3.16 - How many different anagrams (including nonsensical...Ch. 3.16 - Prob. 16.3ECh. 3.16 - Prob. 16.4ECh. 3.16 - Prob. 16.5ECh. 3.16 - Prob. 16.6ECh. 3.16 - Prob. 16.7ECh. 3.16 - Prob. 16.8ECh. 3.16 - Prob. 16.9ECh. 3.16 - Prob. 16.10ECh. 3.16 - Prob. 16.11ECh. 3.16 - Prob. 16.12ECh. 3.16 - Prob. 16.13ECh. 3.16 - Prob. 16.14ECh. 3.16 - How many partitions, with exactly two parts, can...Ch. 3.16 - Prob. 16.16ECh. 3.16 - Prob. 16.17ECh. 3.16 - Prob. 16.18ECh. 3.16 - Prob. 16.19ECh. 3.16 - Prob. 16.20ECh. 3.17 - Prob. 17.1ECh. 3.17 - Prob. 17.2ECh. 3.17 - Prob. 17.3ECh. 3.17 - Prob. 17.4ECh. 3.17 - Prob. 17.5ECh. 3.17 - Prob. 17.6ECh. 3.17 - Prob. 17.7ECh. 3.17 - Prob. 17.8ECh. 3.17 - Prob. 17.9ECh. 3.17 - Prob. 17.10ECh. 3.17 - Prob. 17.11ECh. 3.17 - Prob. 17.12ECh. 3.17 - Prob. 17.13ECh. 3.17 - Prob. 17.14ECh. 3.17 - Prob. 17.15ECh. 3.17 - Consider the following formula: kkn=nk1n1. Give...Ch. 3.17 - Prob. 17.17ECh. 3.17 - Prob. 17.18ECh. 3.17 - Prob. 17.19ECh. 3.17 - Prob. 17.20ECh. 3.17 - Prob. 17.21ECh. 3.17 - Prob. 17.22ECh. 3.17 - Prob. 17.23ECh. 3.17 - Prob. 17.24ECh. 3.17 - Prob. 17.25ECh. 3.17 - Prove: 0nnn+1nn1n+2nn2n++n1n1n+nn0n=n2n.Ch. 3.17 - How many Social Security numbers (see Exercise...Ch. 3.17 - Prob. 17.28ECh. 3.17 - Prob. 17.29ECh. 3.17 - Prob. 17.30ECh. 3.17 - Prob. 17.31ECh. 3.17 - Prob. 17.32ECh. 3.17 - Prob. 17.33ECh. 3.17 - Prob. 17.34ECh. 3.17 - Prob. 17.35ECh. 3.17 - Prob. 17.36ECh. 3.17 - Prob. 17.37ECh. 3.18 - Prob. 18.1ECh. 3.18 - Prob. 18.2ECh. 3.18 - Prob. 18.3ECh. 3.18 - Prob. 18.4ECh. 3.18 - Prob. 18.5ECh. 3.18 - Prob. 18.6ECh. 3.18 - Prob. 18.7ECh. 3.18 - Prob. 18.8ECh. 3.18 - Prob. 18.9ECh. 3.18 - Prob. 18.10ECh. 3.18 - Prob. 18.11ECh. 3.18 - Prob. 18.12ECh. 3.18 - Prob. 18.13ECh. 3.18 - Prob. 18.14ECh. 3.18 - Prob. 18.15ECh. 3.18 - Prob. 18.16ECh. 3.18 - Prob. 18.17ECh. 3.18 - Prob. 18.18ECh. 3.18 - Prob. 18.19ECh. 3.19 - Prob. 19.1ECh. 3.19 - Prob. 19.2ECh. 3.19 - Prob. 19.3ECh. 3.19 - Prob. 19.4ECh. 3.19 - How many five-letter words can you make in which...Ch. 3.19 - This problem asks you to give two proofs for...Ch. 3.19 - Prob. 19.7ECh. 3.19 - Prob. 19.8ECh. 3.19 - Prob. 19.9ECh. 3.19 - Prob. 19.10ECh. 3.19 - Prob. 19.11ECh. 3.19 - Prob. 19.12ECh. 3 - Prob. 1STCh. 3 - Prob. 2STCh. 3 - Prob. 3STCh. 3 - Prob. 4STCh. 3 - Prob. 5STCh. 3 - Prob. 6STCh. 3 - Prob. 7STCh. 3 - Prob. 8STCh. 3 - Prob. 9STCh. 3 - Prob. 10STCh. 3 - Prob. 11STCh. 3 - Prob. 12STCh. 3 - Prob. 13STCh. 3 - Prob. 14STCh. 3 - Prob. 15STCh. 3 - Prob. 16STCh. 3 - Prob. 17STCh. 3 - Prob. 18STCh. 3 - Prob. 19STCh. 3 - Prob. 20STCh. 3 - Prob. 21STCh. 3 - Prob. 22ST
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