NATURE OF MATHEMATICS LL + WEBASSIGN
13th Edition
ISBN: 9780357325865
Author: SMITH
Publisher: CENGAGE L
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Chapter 4.2, Problem 3PS
To determine
To explain:
About abacus.
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Construct a know-show table for each statement below that appears to be true.
Problem 3. Pricing a multi-stock option the Margrabe formula
The purpose of this problem is to price a swap option in a 2-stock model, similarly as
what we did in the example in the lectures. We consider a two-dimensional Brownian
motion given by W₁ = (W(¹), W(2)) on a probability space (Q, F,P). Two stock prices
are modeled by the following equations:
dX
=
dY₁ =
X₁ (rdt+
rdt+0₁dW!)
(²)),
Y₁ (rdt+dW+0zdW!"),
with Xo
xo and Yo =yo. This corresponds to the multi-stock model studied in class,
but with notation (X+, Y₁) instead of (S(1), S(2)). Given the model above, the measure
P is already the risk-neutral measure (Both stocks have rate of return r). We write
σ = 0₁+0%. We consider a swap option, which gives you the right, at time T, to
exchange one share of X for one share of Y. That is, the option has payoff
F=(Yr-XT).
(a) We first assume that r = 0 (for questions (a)-(f)). Write an explicit expression for
the process Xt.
Reminder before proceeding to question (b): Girsanov's theorem…
Problem 1. Multi-stock model
We consider a 2-stock model similar to the one studied in class. Namely, we consider
=
S(1)
S(2)
=
S(¹) exp (σ1B(1) + (M1 - 0/1 )
S(²) exp (02B(2) + (H₂-
M2
where (B(¹) ) +20 and (B(2) ) +≥o are two Brownian motions, with
t≥0
Cov (B(¹), B(2)) = p min{t, s}.
"
The purpose of this problem is to prove that there indeed exists a 2-dimensional Brownian
motion (W+)+20 (W(1), W(2))+20 such that
=
S(1)
S(2)
=
=
S(¹) exp (011W(¹) + (μ₁ - 01/1) t)
롱)
S(²) exp (021W (1) + 022W(2) + (112 - 03/01/12) t).
where σ11, 21, 22 are constants to be determined (as functions of σ1, σ2, p).
Hint: The constants will follow the formulas developed in the lectures.
(a) To show existence of (Ŵ+), first write the expression for both W. (¹) and W (2)
functions of (B(1), B(²)).
as
(b) Using the formulas obtained in (a), show that the process (WA) is actually a 2-
dimensional standard Brownian motion (i.e. show that each component is normal,
with mean 0, variance t, and that their…
Chapter 4 Solutions
NATURE OF MATHEMATICS LL + WEBASSIGN
Ch. 4.1 - IN YOUR OWN WORDS Explain the difference between...Ch. 4.1 - IN YOUR OWN WORDS Discuss the similarities and...Ch. 4.1 - IN YOUR OWN WORDS What do you regard as the...Ch. 4.1 - Prob. 4PSCh. 4.1 - Prob. 5PSCh. 4.1 - Prob. 6PSCh. 4.1 - Prob. 7PSCh. 4.1 - Tell which of the named properties apply to the...Ch. 4.1 - Write each numeral in problems 920 as a decimal...Ch. 4.1 - Prob. 10PS
Ch. 4.1 - Prob. 11PSCh. 4.1 - Prob. 12PSCh. 4.1 - Prob. 13PSCh. 4.1 - Prob. 14PSCh. 4.1 - Prob. 15PSCh. 4.1 - Write each numeral in Problems 920 as a decimal...Ch. 4.1 - Prob. 17PSCh. 4.1 - Prob. 18PSCh. 4.1 - Prob. 19PSCh. 4.1 - Prob. 20PSCh. 4.1 - Prob. 21PSCh. 4.1 - Prob. 22PSCh. 4.1 - Prob. 23PSCh. 4.1 - Prob. 24PSCh. 4.1 - Prob. 25PSCh. 4.1 - Prob. 26PSCh. 4.1 - Prob. 27PSCh. 4.1 - Prob. 28PSCh. 4.1 - Prob. 29PSCh. 4.1 - Prob. 30PSCh. 4.1 - Prob. 31PSCh. 4.1 - Prob. 32PSCh. 4.1 - Prob. 33PSCh. 4.1 - Prob. 34PSCh. 4.1 - Prob. 35PSCh. 4.1 - Prob. 36PSCh. 4.1 - Prob. 37PSCh. 4.1 - Prob. 38PSCh. 4.1 - Prob. 39PSCh. 4.1 - Prob. 40PSCh. 4.1 - Prob. 41PSCh. 4.1 - Prob. 42PSCh. 4.1 - Prob. 43PSCh. 4.1 - Perform the indicated operations in Problems 4348.Ch. 4.1 - Prob. 45PSCh. 4.1 - Prob. 46PSCh. 4.1 - Prob. 47PSCh. 4.1 - Prob. 48PSCh. 4.1 - Prob. 49PSCh. 4.1 - What is the largest number that begins with the...Ch. 4.1 - Prob. 51PSCh. 4.1 - Prob. 52PSCh. 4.1 - Prob. 53PSCh. 4.1 - Prob. 54PSCh. 4.1 - Prob. 55PSCh. 4.1 - a. What is the largest number that uses each of...Ch. 4.1 - Prob. 57PSCh. 4.1 - Prob. 58PSCh. 4.1 - Prob. 59PSCh. 4.1 - Prob. 60PSCh. 4.2 - IN YOUR OWN WORDS Discuss the difference between...Ch. 4.2 - Prob. 2PSCh. 4.2 - Prob. 3PSCh. 4.2 - Prob. 4PSCh. 4.2 - Prob. 5PSCh. 4.2 - Prob. 6PSCh. 4.2 - Prob. 7PSCh. 4.2 - Prob. 8PSCh. 4.2 - Give the meaning of the numeral 5 in each of the...Ch. 4.2 - Prob. 10PSCh. 4.2 - Give the meaning of the numeral 5 in each of the...Ch. 4.2 - Prob. 12PSCh. 4.2 - Prob. 13PSCh. 4.2 - Prob. 14PSCh. 4.2 - Prob. 15PSCh. 4.2 - Prob. 16PSCh. 4.2 - Prob. 17PSCh. 4.2 - Prob. 18PSCh. 4.2 - Prob. 19PSCh. 4.2 - Prob. 20PSCh. 4.2 - Prob. 21PSCh. 4.2 - Prob. 22PSCh. 4.2 - Prob. 23PSCh. 4.2 - Prob. 24PSCh. 4.2 - Prob. 25PSCh. 4.2 - Prob. 26PSCh. 4.2 - Prob. 27PSCh. 4.2 - Prob. 28PSCh. 4.2 - Prob. 29PSCh. 4.2 - Prob. 30PSCh. 4.2 - Prob. 31PSCh. 4.2 - Prob. 32PSCh. 4.2 - Prob. 33PSCh. 4.2 - Prob. 34PSCh. 4.2 - Write each of the numbers in Problems 3142 in...Ch. 4.2 - Prob. 36PSCh. 4.2 - Prob. 37PSCh. 4.2 - Prob. 38PSCh. 4.2 - Prob. 39PSCh. 4.2 - Prob. 40PSCh. 4.2 - Prob. 41PSCh. 4.2 - Prob. 42PSCh. 4.2 - Prob. 43PSCh. 4.2 - Prob. 44PSCh. 4.2 - Prob. 45PSCh. 4.2 - Prob. 46PSCh. 4.2 - Prob. 47PSCh. 4.2 - Prob. 48PSCh. 4.2 - Prob. 49PSCh. 4.2 - Prob. 50PSCh. 4.2 - Prob. 51PSCh. 4.2 - Prob. 52PSCh. 4.2 - Prob. 53PSCh. 4.2 - Prob. 54PSCh. 4.2 - Prob. 55PSCh. 4.2 - Prob. 56PSCh. 4.2 - Prob. 57PSCh. 4.2 - Prob. 58PSCh. 4.2 - Prob. 59PSCh. 4.2 - Prob. 60PSCh. 4.3 - Prob. 1PSCh. 4.3 - Prob. 2PSCh. 4.3 - Prob. 3PSCh. 4.3 - Prob. 4PSCh. 4.3 - Count the number of people in the indicated base....Ch. 4.3 - Count the number of people in the indicated base....Ch. 4.3 - Prob. 7PSCh. 4.3 - Prob. 8PSCh. 4.3 - Prob. 9PSCh. 4.3 - Prob. 10PSCh. 4.3 - Prob. 11PSCh. 4.3 - Prob. 12PSCh. 4.3 - Prob. 13PSCh. 4.3 - Prob. 14PSCh. 4.3 - Prob. 15PSCh. 4.3 - Prob. 16PSCh. 4.3 - Prob. 17PSCh. 4.3 - Prob. 18PSCh. 4.3 - Prob. 19PSCh. 4.3 - Prob. 20PSCh. 4.3 - Prob. 21PSCh. 4.3 - Prob. 22PSCh. 4.3 - Prob. 23PSCh. 4.3 - Prob. 24PSCh. 4.3 - Prob. 25PSCh. 4.3 - Prob. 26PSCh. 4.3 - Prob. 27PSCh. 4.3 - Prob. 28PSCh. 4.3 - Prob. 29PSCh. 4.3 - Prob. 30PSCh. 4.3 - Prob. 31PSCh. 4.3 - Prob. 32PSCh. 4.3 - Prob. 33PSCh. 4.3 - Prob. 34PSCh. 4.3 - Prob. 35PSCh. 4.3 - Prob. 36PSCh. 4.3 - Prob. 37PSCh. 4.3 - Use number bases to answer the questions in...Ch. 4.3 - Prob. 39PSCh. 4.3 - Prob. 40PSCh. 4.3 - Prob. 41PSCh. 4.3 - Prob. 42PSCh. 4.3 - Prob. 43PSCh. 4.3 - Prob. 44PSCh. 4.3 - Prob. 45PSCh. 4.3 - Prob. 46PSCh. 4.3 - Prob. 47PSCh. 4.3 - Prob. 48PSCh. 4.3 - Prob. 49PSCh. 4.3 - Prob. 50PSCh. 4.3 - Prob. 51PSCh. 4.3 - Prob. 52PSCh. 4.3 - Prob. 53PSCh. 4.3 - Prob. 54PSCh. 4.3 - Prob. 55PSCh. 4.3 - Prob. 56PSCh. 4.3 - Prob. 57PSCh. 4.3 - Prob. 58PSCh. 4.3 - Prob. 59PSCh. 4.3 - Prob. 60PSCh. 4.4 - Prob. 1PSCh. 4.4 - Prob. 2PSCh. 4.4 - What decimal number is represented by the light...Ch. 4.4 - Prob. 4PSCh. 4.4 - What decimal number is represented by the light...Ch. 4.4 - Prob. 6PSCh. 4.4 - Prob. 7PSCh. 4.4 - Prob. 8PSCh. 4.4 - Prob. 9PSCh. 4.4 - Prob. 10PSCh. 4.4 - Prob. 11PSCh. 4.4 - Prob. 12PSCh. 4.4 - Prob. 13PSCh. 4.4 - Prob. 14PSCh. 4.4 - Prob. 15PSCh. 4.4 - Prob. 16PSCh. 4.4 - Prob. 17PSCh. 4.4 - Prob. 18PSCh. 4.4 - Prob. 19PSCh. 4.4 - Prob. 20PSCh. 4.4 - Prob. 21PSCh. 4.4 - Prob. 22PSCh. 4.4 - Prob. 23PSCh. 4.4 - Prob. 24PSCh. 4.4 - Prob. 25PSCh. 4.4 - Prob. 26PSCh. 4.4 - Prob. 27PSCh. 4.4 - Prob. 28PSCh. 4.4 - Prob. 29PSCh. 4.4 - Prob. 30PSCh. 4.4 - Prob. 31PSCh. 4.4 - Prob. 32PSCh. 4.4 - Prob. 33PSCh. 4.4 - Prob. 34PSCh. 4.4 - Prob. 35PSCh. 4.4 - Prob. 36PSCh. 4.4 - Prob. 37PSCh. 4.4 - Prob. 38PSCh. 4.4 - Prob. 39PSCh. 4.4 - Prob. 40PSCh. 4.4 - Perform the indicated operations in Problems 3946....Ch. 4.4 - Prob. 42PSCh. 4.4 - Prob. 43PSCh. 4.4 - Prob. 44PSCh. 4.4 - Prob. 45PSCh. 4.4 - Prob. 46PSCh. 4.4 - Prob. 47PSCh. 4.4 - Prob. 48PSCh. 4.4 - Prob. 49PSCh. 4.4 - Prob. 50PSCh. 4.4 - Prob. 51PSCh. 4.4 - Prob. 52PSCh. 4.4 - Prob. 53PSCh. 4.4 - Prob. 54PSCh. 4.4 - Prob. 55PSCh. 4.4 - Prob. 56PSCh. 4.4 - Prob. 57PSCh. 4.4 - Prob. 58PSCh. 4.4 - Prob. 59PSCh. 4.4 - Prob. 60PSCh. 4.5 - IN YOUR OWN WORDS Describe some of the computing...Ch. 4.5 - Prob. 2PSCh. 4.5 - Prob. 3PSCh. 4.5 - Prob. 4PSCh. 4.5 - Prob. 5PSCh. 4.5 - Prob. 6PSCh. 4.5 - Prob. 7PSCh. 4.5 - Prob. 8PSCh. 4.5 - Prob. 9PSCh. 4.5 - Prob. 10PSCh. 4.5 - Prob. 11PSCh. 4.5 - Prob. 12PSCh. 4.5 - Prob. 13PSCh. 4.5 - Prob. 14PSCh. 4.5 - Prob. 15PSCh. 4.5 - Prob. 16PSCh. 4.5 - Prob. 17PSCh. 4.5 - Prob. 18PSCh. 4.5 - Prob. 19PSCh. 4.5 - Prob. 20PSCh. 4.5 - Prob. 21PSCh. 4.5 - Prob. 22PSCh. 4.5 - Prob. 23PSCh. 4.5 - Prob. 24PSCh. 4.5 - Prob. 25PSCh. 4.5 - Prob. 26PSCh. 4.5 - Prob. 27PSCh. 4.5 - Prob. 28PSCh. 4.5 - Prob. 29PSCh. 4.5 - Prob. 30PSCh. 4.5 - Prob. 31PSCh. 4.5 - Prob. 32PSCh. 4.5 - Prob. 33PSCh. 4.5 - Prob. 34PSCh. 4.5 - Prob. 35PSCh. 4.5 - Prob. 36PSCh. 4.5 - Problems 3445 list a specific task. Decide whether...Ch. 4.5 - Prob. 38PSCh. 4.5 - Prob. 39PSCh. 4.5 - Prob. 40PSCh. 4.5 - Prob. 41PSCh. 4.5 - Prob. 42PSCh. 4.5 - Prob. 43PSCh. 4.5 - Prob. 44PSCh. 4.5 - Prob. 45PSCh. 4.5 - Prob. 46PSCh. 4.5 - Prob. 47PSCh. 4.5 - Prob. 48PSCh. 4.5 - Prob. 49PSCh. 4.5 - Prob. 50PSCh. 4.5 - Prob. 51PSCh. 4.5 - Prob. 52PSCh. 4.5 - Prob. 53PSCh. 4.5 - Prob. 54PSCh. 4.5 - Prob. 55PSCh. 4.5 - Prob. 56PSCh. 4.5 - Prob. 57PSCh. 4.5 - Prob. 58PSCh. 4.5 - Prob. 59PSCh. 4.5 - Prob. 60PSCh. 4.CR - Prob. 1CRCh. 4.CR - Prob. 2CRCh. 4.CR - Prob. 3CRCh. 4.CR - Prob. 4CRCh. 4.CR - Prob. 5CRCh. 4.CR - Prob. 6CRCh. 4.CR - Prob. 7CRCh. 4.CR - Prob. 8CRCh. 4.CR - Prob. 9CRCh. 4.CR - Prob. 10CRCh. 4.CR - Prob. 11CRCh. 4.CR - Prob. 12CRCh. 4.CR - Prob. 13CRCh. 4.CR - Prob. 14CRCh. 4.CR - Prob. 15CRCh. 4.CR - Prob. 16CRCh. 4.CR - Prob. 17CRCh. 4.CR - Prob. 18CRCh. 4.CR - Prob. 19CRCh. 4.CR - Prob. 20CR
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