A First Course in Differential Equations with Modeling Applications (MindTap Course List)
11th Edition
ISBN: 9781305965720
Author: Dennis G. Zill
Publisher: Cengage Learning
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Chapter 6.3, Problem 32E
To determine
The number of solutions of the differential equation
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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 6 Solutions
A First Course in Differential Equations with Modeling Applications (MindTap Course List)
Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 1–10 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 1–10 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...Ch. 6.1 - In Problems 110 find the interval and radius of...
Ch. 6.1 - In Problems 1116 use an appropriate series in (2)...Ch. 6.1 - In Problems 1116 use an appropriate series in (2)...Ch. 6.1 - In Problems 1116 use an appropriate series in (2)...Ch. 6.1 - In Problems 11–16 use an appropriate series in (2)...Ch. 6.1 - In Problems 1116 use an appropriate series in (2)...Ch. 6.1 - In Problems 1116 use an appropriate series in (2)...Ch. 6.1 - In Problems 17 and 18 use an appropriate series in...Ch. 6.1 - In Problems 17 and 18 use an appropriate series in...Ch. 6.1 - In Problems 19 and 20 the given function is...Ch. 6.1 - In Problems 19 and 20 the given function is...Ch. 6.1 - In Problems 21 and 22 the given function is...Ch. 6.1 - In Problems 21 and 22 the given function is...Ch. 6.1 - In Problems 23 and 24 use a substitution to shift...Ch. 6.1 - In Problems 23 and 24 use a substitution to shift...Ch. 6.1 - In Problems 2530 proceed as in Example 3 to...Ch. 6.1 - In Problems 2530 proceed as in Example 3 to...Ch. 6.1 - In Problems 2530 proceed as in Example 3 to...Ch. 6.1 - In Problems 2530 proceed as in Example 3 to...Ch. 6.1 - In Problems 2530 proceed as in Example 3 to...Ch. 6.1 - In Problems 2530 proceed as in Example 3 to...Ch. 6.1 - In Problems 3134 verify by direct substitution...Ch. 6.1 - In Problems 3134 verify by direct substitution...Ch. 6.1 - In Problems 3134 verify by direct substitution...Ch. 6.1 - In Problems 3134 verify by direct substitution...Ch. 6.1 - In Problems 35–38 proceed as in Example 4 and find...Ch. 6.1 - In Problems 3538 proceed as in Example 4 and find...Ch. 6.1 - In Problems 3538 proceed as in Example 4 and find...Ch. 6.1 - Prob. 38ECh. 6.1 - Prob. 39ECh. 6.1 - Prob. 40ECh. 6.2 - In Problems 1 and 2 without actually solving the...Ch. 6.2 - In Problems 1 and 2 without actually solving the...Ch. 6.2 - In Problems 3–6 find two power series solutions of...Ch. 6.2 - In Problems 36 find two power series solutions of...Ch. 6.2 - In Problems 3–6 find two power series solutions of...Ch. 6.2 - In Problems 36 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 7–18 find two power series solutions...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 718 find two power series solutions of...Ch. 6.2 - In Problems 1922 use the power series method to...Ch. 6.2 - In Problems 1922 use the power series method to...Ch. 6.2 - In Problems 1922 use the power series method to...Ch. 6.2 - In Problems 19–22 use the power series method to...Ch. 6.2 - In Problems 23 and 24 use the procedure in Example...Ch. 6.2 - In Problems 23 and 24 use the procedure in Example...Ch. 6.2 - Without actually solving the differential equation...Ch. 6.2 - How can the power series method be used to solve...Ch. 6.2 - Is x = 0 an ordinary or a singular point of the...Ch. 6.2 - Prob. 28ECh. 6.3 - In Problems 110 determine the singular points of...Ch. 6.3 - Prob. 2ECh. 6.3 - In Problems 110 determine the singular points of...Ch. 6.3 - In Problems 110 determine the singular points of...Ch. 6.3 - In Problems 110 determine the singular points of...Ch. 6.3 - Prob. 6ECh. 6.3 - Prob. 7ECh. 6.3 - Prob. 8ECh. 6.3 - Prob. 9ECh. 6.3 - Prob. 10ECh. 6.3 - Prob. 11ECh. 6.3 - Prob. 12ECh. 6.3 - In Problems 13 and 14, x = 0 is a regular singular...Ch. 6.3 - Prob. 14ECh. 6.3 - Prob. 15ECh. 6.3 - Prob. 16ECh. 6.3 - Prob. 17ECh. 6.3 - Prob. 18ECh. 6.3 - In Problems 1524, x = 0 is a regular singular...Ch. 6.3 - Prob. 20ECh. 6.3 - Prob. 21ECh. 6.3 - Prob. 22ECh. 6.3 - Prob. 23ECh. 6.3 - Prob. 24ECh. 6.3 - Prob. 25ECh. 6.3 - In Problems 2530, x = 0 is a regular singular...Ch. 6.3 - In Problems 2530, x = 0 is a regular singular...Ch. 6.3 - Prob. 28ECh. 6.3 - Prob. 29ECh. 6.3 - Prob. 30ECh. 6.3 - Prob. 31ECh. 6.3 - Prob. 32ECh. 6.3 - (a) The differential equation x4y + y = 0 has an...Ch. 6.3 - Prob. 35ECh. 6.3 - Prob. 36ECh. 6.3 - Prob. 37ECh. 6.4 - Prob. 1ECh. 6.4 - Prob. 2ECh. 6.4 - Prob. 3ECh. 6.4 - Bessels Equation In Problems 16 use (1) to find...Ch. 6.4 - Prob. 5ECh. 6.4 - Prob. 6ECh. 6.4 - Prob. 7ECh. 6.4 - Prob. 8ECh. 6.4 - Prob. 9ECh. 6.4 - Prob. 10ECh. 6.4 - In Problems 11 and 12 use the indicated change of...Ch. 6.4 - Prob. 12ECh. 6.4 - Prob. 13ECh. 6.4 - Prob. 14ECh. 6.4 - Prob. 15ECh. 6.4 - Prob. 16ECh. 6.4 - Prob. 17ECh. 6.4 - Prob. 18ECh. 6.4 - Prob. 19ECh. 6.4 - Prob. 20ECh. 6.4 - Prob. 21ECh. 6.4 - Prob. 22ECh. 6.4 - Prob. 23ECh. 6.4 - Prob. 24ECh. 6.4 - Prob. 25ECh. 6.4 - Prob. 26ECh. 6.4 - Prob. 27ECh. 6.4 - Prob. 28ECh. 6.4 - Prob. 29ECh. 6.4 - Prob. 30ECh. 6.4 - Prob. 31ECh. 6.4 - Use the recurrence relation in Problem 28 along...Ch. 6.4 - Prob. 33ECh. 6.4 - Prob. 34ECh. 6.4 - Use the change of variables s=2kmet/2 to show that...Ch. 6.4 - Show that y=x1/2w(23x3/2) is a solution of the...Ch. 6.4 - Prob. 37ECh. 6.4 - Prob. 38ECh. 6.4 - Prob. 39ECh. 6.4 - (a) Use the explicit solutions y1(x) and y2(x) of...Ch. 6.4 - Prob. 47ECh. 6.4 - Show that the differential equation...Ch. 6.4 - Find the first three positive values of for which...Ch. 6.4 - Prob. 53ECh. 6.4 - Prob. 54ECh. 6.4 - Prob. 55ECh. 6.4 - Prob. 56ECh. 6 - In Problems 1 and 2 answer true or false without...Ch. 6 - Prob. 2RECh. 6 - Both power series solutions of y + ln(x + 1)y + y...Ch. 6 - x = 0 is an ordinary point of a certain linear...Ch. 6 - Suppose the power series k0ck(x4)k is known to...Ch. 6 - Prob. 6RECh. 6 - Prob. 7RECh. 6 - Prob. 8RECh. 6 - Prob. 9RECh. 6 - Prob. 10RECh. 6 - Prob. 11RECh. 6 - Prob. 12RECh. 6 - Prob. 13RECh. 6 - Prob. 14RECh. 6 - Prob. 15RECh. 6 - Prob. 16RECh. 6 - Without actually solving the differential equation...Ch. 6 - Prob. 18RECh. 6 - Prob. 19RECh. 6 - Prob. 20RECh. 6 - Prob. 21RECh. 6 - The first-order differential equation dy/dx = x2 +...Ch. 6 - Prob. 23RECh. 6 - Prob. 24RECh. 6 - Prob. 25RECh. 6 - Prob. 26RECh. 6 - Cooling Fin A cooling fin is an outward projection...Ch. 6 - Solve the differential equation in Problem 27 if...
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