Introductory Combinatorics
5th Edition
ISBN: 9780136020400
Author: Richard A. Brualdi
Publisher: Prentice Hall
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Chapter 5, Problem 9E
To determine
To evaluate: The sum of
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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?
Chapter 5 Solutions
Introductory Combinatorics
Ch. 5 - Prob. 1ECh. 5 - Fill in the rows of Pascal’s triangle...Ch. 5 - Consider the sum of the binomial coefficients...Ch. 5 - Expand (x + y)5 and (x + y)6 using the binomial...Ch. 5 - Expand (2x − y)7 using the binomial theorem.
Ch. 5 - What is the coefficient of x5y13 in the expansion...Ch. 5 - Use the binomial theorem to prove that
Generalize...Ch. 5 - Use the binomial theorem to prove that
Ch. 5 - Evaluate the sum
Ch. 5 - Use combinatorial reasoning to prove the identity...
Ch. 5 - Use combinatorial reasoning to prove the identity...Ch. 5 - Let n be a positive integer. Prove that
(Hint:...Ch. 5 - Find one binomial coefficient equal to the...Ch. 5 - Prob. 14ECh. 5 - Prove, that for every integer n > 1,
Ch. 5 - By integrating the binomial expansion, prove that,...Ch. 5 - Prob. 17ECh. 5 - Evaluate the sum
Ch. 5 - Sum the series by observing that
and using the...Ch. 5 - Find integers a, b, and c such that
for all m....Ch. 5 - Prob. 21ECh. 5 - Prob. 22ECh. 5 - Prob. 23ECh. 5 - Prob. 24ECh. 5 - Use a combinatorial argument to prove the...Ch. 5 - Let n and k be integers with 1 ≤ k ≤ n. Prove...Ch. 5 - Let n and k be positive integers. Give a...Ch. 5 - Let n and k be positive integers. Give a...Ch. 5 - Find and prove a formula for
where the summation...Ch. 5 - Prove that the only antichain of S = {1, 2, 3, 4}...Ch. 5 - Prove that there are only two antichains of S =...Ch. 5 - Let S be a set of n elements. Prove that, if n is...Ch. 5 - Construct a partition of the subsets of {1, 2, 3,...Ch. 5 - In a partition of the subsets of {1,2, …, n} into...Ch. 5 - A talk show host has just bought 10 new jokes....Ch. 5 - Prove the identity of Exercise 25 using the...Ch. 5 - Use the multinomial theorem to show that, for...Ch. 5 - Use the multinomial theorem to expand (x1 + x2 +...Ch. 5 - Determine the coefficient of in the expansion...Ch. 5 - What is the coefficient of in the expansion of
Ch. 5 - Prob. 41ECh. 5 - Prob. 42ECh. 5 - Prove by induction on n that, for n a positive...Ch. 5 - Prove that
where the summation extends over all...Ch. 5 - Prove that
where the summation extends over all...Ch. 5 - Use Newton’s binomial theorem to approximate .
Ch. 5 - Use Newton’s binomial theorem to approximate...Ch. 5 - Use Theorem 5.6.1 to show that, if m and n are...Ch. 5 - Use Theorem 5.6.1 to show that, if m and n are...Ch. 5 - Prob. 50ECh. 5 - Let R and S be two partial orders on the same set...
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