EBK STATISTICS FOR ENGINEERS AND SCIENT
4th Edition
ISBN: 9780100274389
Author: Navidi
Publisher: YUZU
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Chapter 7, Problem 22SE
To determine
Derive the formula
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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 7 Solutions
EBK STATISTICS FOR ENGINEERS AND SCIENT
Ch. 7.1 - Compute the correlation coefficient for the...Ch. 7.1 - For each of the following data sets, explain why...Ch. 7.1 - For each of the following scatterplots, state...Ch. 7.1 - True or false, and explain briefly: a. If the...Ch. 7.1 - In a study of ground motion caused by earthquakes,...Ch. 7.1 - A chemical engineer is studying the effect of...Ch. 7.1 - Another chemical engineer is studying the same...Ch. 7.1 - Tire pressure (in kPa) was measured for the right...Ch. 7.1 - Prob. 10ECh. 7.1 - The article Drift in Posturography Systems...
Ch. 7.1 - Prob. 12ECh. 7.1 - Prob. 13ECh. 7.1 - A scatterplot contains four points: (2, 2), (1,...Ch. 7.2 - Each month for several months, the average...Ch. 7.2 - In a study of the relationship between the Brinell...Ch. 7.2 - A least-squares line is fit to a set of points. If...Ch. 7.2 - Prob. 4ECh. 7.2 - In Galtons height data (Figure 7.1, in Section...Ch. 7.2 - In a study relating the degree of warping, in mm....Ch. 7.2 - Moisture content in percent by volume (x) and...Ch. 7.2 - The following table presents shear strengths (in...Ch. 7.2 - Structural engineers use wireless sensor networks...Ch. 7.2 - The article Effect of Environmental Factors on...Ch. 7.2 - An agricultural scientist planted alfalfa on...Ch. 7.2 - Curing times in days (x) and compressive strengths...Ch. 7.2 - Prob. 13ECh. 7.2 - An engineer wants to predict the value for y when...Ch. 7.2 - A simple random sample of 100 men aged 2534...Ch. 7.2 - Prob. 16ECh. 7.3 - A chemical reaction is run 12 times, and the...Ch. 7.3 - Structural engineers use wireless sensor networks...Ch. 7.3 - Prob. 3ECh. 7.3 - Prob. 4ECh. 7.3 - Prob. 5ECh. 7.3 - Prob. 6ECh. 7.3 - The coefficient of absorption (COA) for a clay...Ch. 7.3 - Prob. 8ECh. 7.3 - Prob. 9ECh. 7.3 - Three engineers are independently estimating the...Ch. 7.3 - In the skin permeability example (Example 7.17)...Ch. 7.3 - Prob. 12ECh. 7.3 - In a study of copper bars, the relationship...Ch. 7.3 - Prob. 14ECh. 7.3 - In the following MINITAB output, some of the...Ch. 7.3 - Prob. 16ECh. 7.3 - In order to increase the production of gas wells,...Ch. 7.4 - The following output (from MINITAB) is for the...Ch. 7.4 - The processing of raw coal involves washing, in...Ch. 7.4 - To determine the effect of temperature on the...Ch. 7.4 - The depth of wetting of a soil is the depth to...Ch. 7.4 - Good forecasting and control of preconstruction...Ch. 7.4 - The article Drift in Posturography Systems...Ch. 7.4 - Prob. 7ECh. 7.4 - Prob. 8ECh. 7.4 - A windmill is used to generate direct current....Ch. 7.4 - Two radon detectors were placed in different...Ch. 7.4 - Prob. 11ECh. 7.4 - The article The Selection of Yeast Strains for the...Ch. 7.4 - Prob. 13ECh. 7.4 - The article Characteristics and Trends of River...Ch. 7.4 - Prob. 15ECh. 7.4 - The article Mechanistic-Empirical Design of...Ch. 7.4 - An engineer wants to determine the spring constant...Ch. 7 - The BeerLambert law relates the absorbance A of a...Ch. 7 - Prob. 2SECh. 7 - Prob. 3SECh. 7 - Refer to Exercise 3. a. Plot the residuals versus...Ch. 7 - Prob. 5SECh. 7 - The article Experimental Measurement of Radiative...Ch. 7 - Prob. 7SECh. 7 - Prob. 8SECh. 7 - Prob. 9SECh. 7 - Prob. 10SECh. 7 - The article Estimating Population Abundance in...Ch. 7 - A materials scientist is experimenting with a new...Ch. 7 - Monitoring the yield of a particular chemical...Ch. 7 - Prob. 14SECh. 7 - Refer to Exercise 14. Someone wants to compute a...Ch. 7 - Prob. 16SECh. 7 - Prob. 17SECh. 7 - Prob. 18SECh. 7 - Prob. 19SECh. 7 - Use Equation (7.34) (page 545) to show that 1=1.Ch. 7 - Use Equation (7.35) (page 545) to show that 0=0.Ch. 7 - Prob. 22SECh. 7 - Use Equation (7.35) (page 545) to derive the...
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