
Elementary Statistics: Picturing the World (7th Edition)
7th Edition
ISBN: 9780134683416
Author: Ron Larson, Betsy Farber
Publisher: PEARSON
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Question
Chapter 4, Problem 4.3.25RE
a.
To determine
To find: The
To determine: Whether the
b.
To determine
To find: The probability of getting more than six deaths due to sharks for the next year.
To determine: Whether the event is unusual.
c.
To determine
To find: The probability of getting at most five deaths due to sharks for the next year.
To determine: Whether the event is unusual.
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Students have asked these similar questions
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?
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
Chapter 4 Solutions
Elementary Statistics: Picturing the World (7th Edition)
Ch. 4.1 - Determine whether each random variable x is...Ch. 4.1 - A company tracks the number of sales new employees...Ch. 4.1 - Verify that the distribution you constructed in...Ch. 4.1 - Determine whether each distribution is a...Ch. 4.1 - Find the mean of the probability distribution you...Ch. 4.1 - Find the variance and standard deviation of the...Ch. 4.1 - At a raffle, 2000 tickets are sold at 5 each for...Ch. 4.1 - What is a random variable? Give an example of a...Ch. 4.1 - What is a discrete probability distribution? What...Ch. 4.1 - Is the expected value of the probability...
Ch. 4.1 - What does the mean of a probability distribution...Ch. 4.1 - True or False? In Exercises 58, determine whether...Ch. 4.1 - True or False? In Exercises 58, determine whether...Ch. 4.1 - True or False? In Exercises 58, determine whether...Ch. 4.1 - True or False? 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