Fundamentals of Statistics (5th Edition)
5th Edition
ISBN: 9780134508306
Author: Michael Sullivan III
Publisher: PEARSON
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Textbook Question
Chapter 7.4, Problem 4AYU
Suppose X is a binomial random variable. To approximate P(3 ≤ X ≤ 10), compute _____.
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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
Fundamentals of Statistics (5th Edition)
Ch. 7.1 - A _____ _____ _____ is an equation used to compute...Ch. 7.1 - A _______ is an equation, table, or graph used to...Ch. 7.1 - True or False: The normal curve is symmetric about...Ch. 7.1 - The area under the normal curve to the right of ...Ch. 7.1 - The points at x = _____ and x = _____ are the...Ch. 7.1 - The area under a normal curve can be interpreted...Ch. 7.1 - For Problems 712, determine whether the graph can...Ch. 7.1 - For Problems 712, determine whether the graph can...Ch. 7.1 - For Problems 712, determine whether the graph can...Ch. 7.1 - Prob. 10AYU
Ch. 7.1 - For Problems 712, determine whether the graph can...Ch. 7.1 - For Problems 712, determine whether the graph can...Ch. 7.1 - Problems 1316 use the information presented in...Ch. 7.1 - Problems 1316 use the information presented in...Ch. 7.1 - Prob. 15AYUCh. 7.1 - Problems 1316 use the information presented in...Ch. 7.1 - Uniform Distribution The random-number generator...Ch. 7.1 - Uniform Distribution The reaction time X (in...Ch. 7.1 - In Problems 1922, determine whether or not the...Ch. 7.1 - In Problems 1922, determine whether or not the...Ch. 7.1 - In Problems 1922, determine whether or not the...Ch. 7.1 - In Problems 1922, determine whether or not the...Ch. 7.1 - One graph in the figure on the following page...Ch. 7.1 - One graph in the figure below represents a normal...Ch. 7.1 - In Problems 2528, the graph of a normal curve is...Ch. 7.1 - In Problems 2528, the graph of a normal curve is...Ch. 7.1 - Prob. 27AYUCh. 7.1 - In Problems 2528, the graph of a normal curve is...Ch. 7.1 - In Problems 29 and 30, draw a normal curve and...Ch. 7.1 - Prob. 30AYUCh. 7.1 - NW You Explain It! Cell Phone Rates Monthly...Ch. 7.1 - You Explain It! Refrigerators The lives of...Ch. 7.1 - You Explain It! Birth Weights The birth weights of...Ch. 7.1 - You Explain It! Height of 10-Year-Old Males The...Ch. 7.1 - NW You Explain It! Gestation Period The lengths of...Ch. 7.1 - Prob. 36AYUCh. 7.1 - Hitting with a Pitching Wedge In the game of golf,...Ch. 7.1 - Heights of Five-Year-Old Females The following...Ch. 7.1 - Cardiac Arrest Researchers conducted a prospective...Ch. 7.2 - A random variable Z that is normally distributed...Ch. 7.2 - The notation z is the z-score such that the area...Ch. 7.2 - If X is a normal random variable with mean 40 and...Ch. 7.2 - If X is normal random variable with mean 40 and...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 512, find the indicated areas. For...Ch. 7.2 - In Problems 1318, find the indicated z-score. Be...Ch. 7.2 - In Problems 1318, find the indicated z-score. Be...Ch. 7.2 - In Problems 1318, find the indicated z-score. Be...Ch. 7.2 - In Problems 1318, find the indicated z-score. Be...Ch. 7.2 - In Problems 1318, find the indicated z-score. Be...Ch. 7.2 - In Problems 1318, find the indicated z-score. Be...Ch. 7.2 - In Problems 1922, find the value of z. 19. NW...Ch. 7.2 - In Problems 1922, find the value of z. 20. z0.02Ch. 7.2 - In Problems 1922, find the value of z. 21. z0.025Ch. 7.2 - In Problems 1922, find the value of z. 22. z0.015Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 2332, assume that the random variable...Ch. 7.2 - In Problems 3336, assume that the random variable...Ch. 7.2 - In Problems 3336, assume that the random variable...Ch. 7.2 - In Problems 3336, assume that the random variable...Ch. 7.2 - In Problems 3336, assume that the random variable...Ch. 7.2 - Egg Incubation Times The mean incubation time of...Ch. 7.2 - Reading Rates The reading speed of sixth-grade...Ch. 7.2 - NW Chips Ahoy! Cookies The number of chocolate...Ch. 7.2 - Wendys Drive-Through Fast-food restaurants spend...Ch. 7.2 - Gestation Period The lengths of human pregnancies...Ch. 7.2 - Light Bulbs General Electric manufactures a...Ch. 7.2 - Manufacturing Steel rods are manufactured with a...Ch. 7.2 - Manufacturing Ball bearings are manufactured with...Ch. 7.2 - NCAA Basketball Point Spreads In sports betting,...Ch. 7.2 - Prob. 46AYUCh. 7.2 - NW Egg Incubation Times The mean incubation time...Ch. 7.2 - Reading Rates The reading speed of sixth-grade...Ch. 7.2 - Chips Ahoy! Cookies The number of chocolate chips...Ch. 7.2 - Wendys Drive-Through Fast-food restaurants spend...Ch. 7.2 - Speedy Lube The time required for Speedy Lube to...Ch. 7.2 - Putting It Together: Birth Weights The following...Ch. 7.2 - Prob. 53AYUCh. 7.2 - Prob. 54AYUCh. 7.2 - Explain why P(X 220) should be reported as ...Ch. 7.2 - The ACT and SAT are two college entrance exams....Ch. 7.3 - A _____ _____ _____ is a graph that plots observed...Ch. 7.3 - True or False: A normal score is the expected...Ch. 7.3 - In Problems 36, use the results in the table to...Ch. 7.3 - In Problems 36, use the results in the table to...Ch. 7.3 - In Problems 36, use the results in the table to...Ch. 7.3 - In Problems 36, use the results in the table to...Ch. 7.3 - In Problems 710, use a normal probability plot to...Ch. 7.3 - In Problems 710, use a normal probability plot to...Ch. 7.3 - In Problems 710, use a normal probability plot to...Ch. 7.3 - In Problems 710, use a normal probability plot to...Ch. 7.3 - Chips per Bag In a 1998 advertising campaign,...Ch. 7.3 - Hours of TV A random sample of college students...Ch. 7.3 - Putting It Together: Demon Roller Coaster Retrieve...Ch. 7.4 - In a binomial experiment with n trials and...Ch. 7.4 - When adding or subtracting 0.5 from X, we are...Ch. 7.4 - Suppose X is a binomial random variable. To...Ch. 7.4 - Suppose X is a binomial random variable. To...Ch. 7.4 - In Problems 514, a discrete random variable is...Ch. 7.4 - In Problems 514, a discrete random variable is...Ch. 7.4 - In Problems 514, a discrete random variable is...Ch. 7.4 - In Problems 514, a discrete random variable is...Ch. 7.4 - Prob. 9AYUCh. 7.4 - In Problems 514, a discrete random variable is...Ch. 7.4 - Prob. 11AYUCh. 7.4 - In Problems 514, a discrete random variable is...Ch. 7.4 - Prob. 13AYUCh. 7.4 - Prob. 14AYUCh. 7.4 - In Problems 1520, compute P(x) using the binomial...Ch. 7.4 - In Problems 1520, compute P(x) using the binomial...Ch. 7.4 - In Problems 1520, compute P(x) using the binomial...Ch. 7.4 - In Problems 1520, compute P(x) using the binomial...Ch. 7.4 - Prob. 19AYUCh. 7.4 - Prob. 20AYUCh. 7.4 - NW On-Time Flights According to American Airlines,...Ch. 7.4 - Prob. 22AYUCh. 7.4 - Prob. 23AYUCh. 7.4 - Sneeze According to a study done by Nick Wilson of...Ch. 7.4 - Males Living at Home According to the Current...Ch. 7.4 - Females Living at Home According to the Current...Ch. 7.4 - NW Boys Are Preferred In a Gallup poll, 37% of...Ch. 7.4 - Liars According to a USA Today Snapshot, 3% of...Ch. 7 - Use the figure to answer the questions that...Ch. 7 - In Problems 2 and 3, draw a standard normal curve...Ch. 7 - In Problems 2 and 3, draw a standard normal curve...Ch. 7 - Find the z-score such that the area to the right...Ch. 7 - Prob. 5RECh. 7 - Prob. 6RECh. 7 - Prob. 7RECh. 7 - Prob. 8RECh. 7 - Prob. 9RECh. 7 - Tire Wear Suppose that Dunlop Tire manufactures a...Ch. 7 - Wechsler Intelligence Scale The Wechsler...Ch. 7 - Major League Baseballs According to Major League...Ch. 7 - America Reads According to a Gallup poll, 46% of...Ch. 7 - Prob. 14RECh. 7 - Hector obtained a random sample of twenty recent...Ch. 7 - Density of Earth In 1798, Henry Cavendish obtained...Ch. 7 - Creative Thinking According to a USA Today...Ch. 7 - A continuous random variable X is uniformly...Ch. 7 - List the properties of the normal density curve.Ch. 7 - Prob. 20RECh. 7 - Prob. 1CTCh. 7 - Prob. 2CTCh. 7 - Prob. 3CTCh. 7 - Prob. 4CTCh. 7 - Prob. 5CTCh. 7 - Suppose that the talk time on the Apple iPhone is...Ch. 7 - The waist circumference of males 2029 years old is...Ch. 7 - Suppose the scores earned on Professor McArthurs...Ch. 7 - In a poll conducted by the Gallup organization,...Ch. 7 - Prob. 10CTCh. 7 - A continuous random variable X is uniformly...Ch. 7 - The reference interval for HDL cholesterol is...
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- 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…arrow_forwardIn 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.)arrow_forwardThe managing director of a consulting group has the accompanying monthly data on total overhead costs and professional labor hours to bill to clients. Complete parts a through c. Question content area bottom Part 1 a. Develop a simple linear regression model between billable hours and overhead costs. Overhead Costsequals=212495.2212495.2plus+left parenthesis 42.4857 right parenthesis42.485742.4857times×Billable Hours (Round the constant to one decimal place as needed. Round the coefficient to four decimal places as needed. Do not include the $ symbol in your answers.) Part 2 b. Interpret the coefficients of your regression model. Specifically, what does the fixed component of the model mean to the consulting firm? Interpret the fixed term, b 0b0, if appropriate. Choose the correct answer below. A. The value of b 0b0 is the predicted billable hours for an overhead cost of 0 dollars. B. It is not appropriate to interpret b 0b0, because its value…arrow_forward
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