EP INTRODUCTION TO PROBABILITY+STAT.
14th Edition
ISBN: 2810019974203
Author: Mendenhall
Publisher: CENGAGE L
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Chapter 6, Problem 6.60SE
Let x be a binomial random variable with
a.
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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?
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 6 Solutions
EP INTRODUCTION TO PROBABILITY+STAT.
Ch. 6.3 - Consider a standard normal random variable with =0...Ch. 6.3 - Find these probabilities associated with the...Ch. 6.3 - Calculate the area under the standard normal curve...Ch. 6.3 - Calculate the area under the standard normal curve...Ch. 6.3 - Find the following probabilities for the standard...Ch. 6.3 - Find these probabilities for the standard normal...Ch. 6.3 - a. Find a z0 such that P(zz0)=.025 . b. Find a z0...Ch. 6.3 - Prob. 6.8ECh. 6.3 - Prob. 6.9ECh. 6.3 - a. Find a z0 such that P(z0zz0)=.90 . b. Find a z0...
Ch. 6.3 - Find the following percentiles for the standard...Ch. 6.3 - A normal random variable x has mean =10 and...Ch. 6.3 - Prob. 6.13ECh. 6.3 - Prob. 6.14ECh. 6.3 - A normal random variable x has mean 35 and...Ch. 6.3 - Prob. 6.16ECh. 6.3 - A normal random variable x has an unknown mean and...Ch. 6.3 - Hamburger Meat The meat department at a local...Ch. 6.3 - Human Heights Human heights are one of many...Ch. 6.3 - Christmas Trees The diameters of Douglas firs...Ch. 6.3 - Cerebral Blood Flow Cerebral blood flow (CBF) in...Ch. 6.3 - Braking Distances For a car traveling 30 miles per...Ch. 6.3 - Elevator Capacities Suppose that you must...Ch. 6.3 - Sunflowers An experimenter publishing in the...Ch. 6.3 - Prob. 6.26ECh. 6.3 - Prob. 6.27ECh. 6.3 - Prob. 6.28ECh. 6.3 - Prob. 6.30ECh. 6.3 - How Many Words? A publisher has discovered that...Ch. 6.3 - Prob. 6.32ECh. 6.4 - Consider a binomial random variable x with n=25...Ch. 6.4 - Prob. 6.36ECh. 6.4 - Prob. 6.37ECh. 6.4 - Let x be a binomial random variable with n=15 and...Ch. 6.4 - Let x be a binomial random variable with n=100 and...Ch. 6.4 - Prob. 6.40ECh. 6.4 - Prob. 6.41ECh. 6.4 - Prob. 6.42ECh. 6.4 - Prob. 6.43ECh. 6.4 - Prob. 6.44ECh. 6.4 - Prob. 6.45ECh. 6.4 - Prob. 6.46ECh. 6.4 - No Shows Airlines and hotels often grant...Ch. 6.4 - Prob. 6.49ECh. 6.4 - Pepsi’s Market Share Two of the biggest soft drink...Ch. 6.4 - Prob. 6.52ECh. 6.4 - Prob. 6.53ECh. 6 - Prob. 6.54SECh. 6 - Prob. 6.55SECh. 6 - Prob. 6.56SECh. 6 - Prob. 6.57SECh. 6 - a. Find a z0 such that P(z0zz0)=.95 . b. Find a z0...Ch. 6 - Prob. 6.59SECh. 6 - Let x be a binomial random variable with n=36 and...Ch. 6 - Prob. 6.61SECh. 6 - Prob. 6.62SECh. 6 - Prob. 6.63SECh. 6 - Prob. 6.64SECh. 6 - Prob. 6.65SECh. 6 - Prob. 6.66SECh. 6 - Prob. 6.67SECh. 6 - Prob. 6.68SECh. 6 - Prob. 6.69SECh. 6 - Used Cars A used-car dealership has found that the...Ch. 6 - Washers The life span of a type of automatic...Ch. 6 - Prob. 6.74SECh. 6 - Prob. 6.75SECh. 6 - Prob. 6.77SECh. 6 - Prob. 6.78SECh. 6 - Prob. 6.79SECh. 6 - Prob. 6.80SECh. 6 - No Shows An airline finds that 5% of the persons...Ch. 6 - Prob. 6.82SECh. 6 - Plant Genetics In Exercise 5.75, a cross between...Ch. 6 - Prob. 6.84SECh. 6 - Prob. 6.86SECh. 6 - Prob. 6.87SECh. 6 - Introvert or Extrovert? A psychological...Ch. 6 - Normal Distribution? The chest measurements for...Ch. 6 - Prob. 6.91SECh. 6 - Prob. 6.92SECh. 6 - Prob. 6.93SECh. 6 - Prob. 6.94SECh. 6 - Prob. 6.95SECh. 6 - Prob. 6.96SECh. 6 - Prob. 6.97SE
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