Statistics: The Art and Science of Learning from Data (4th Edition)
4th Edition
ISBN: 9780321997838
Author: Alan Agresti, Christine A. Franklin, Bernhard Klingenberg
Publisher: PEARSON
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Chapter 8, Problem 74CP
To determine
Explain the reason for confidence intervals with large confidence levels are narrow when the
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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 8 Solutions
Statistics: The Art and Science of Learning from Data (4th Edition)
Ch. 8.1 - Health care A study dealing with health care...Ch. 8.1 - Video on demand A recent study from Nielsen...Ch. 8.1 - Projecting winning candidate News coverage during...Ch. 8.1 - Believe in hell? Using the General Social Survey...Ch. 8.1 - Government spying In 2014, news reports worldwide...Ch. 8.1 - Game apps The Google Play app store for...Ch. 8.1 - Nutrient effect on growth rate Researchers are...Ch. 8.1 - Believe in heaven? When a GSS asked 1326 subjects,...Ch. 8.1 - Feel lonely often? The GSS has asked On how many...Ch. 8.1 - CI for loneliness Refer to the previous exercise....
Ch. 8.2 - Putin A Gallup poll of 2000 Russians taken between...Ch. 8.2 - Flu shot In a clinical study (the same as...Ch. 8.2 - How green are you? When the 2000 GSS asked...Ch. 8.2 - Make industry help environment? When the 2006 GSS...Ch. 8.2 - Favor death penalty In the 2012 General Social...Ch. 8.2 - Oppose death penalty Refer to the previous...Ch. 8.2 - Stem cell research A Harris poll of a random...Ch. 8.2 - z-score and confidence level Which z-score is used...Ch. 8.2 - Believe in ghosts A Harris poll of a random sample...Ch. 8.2 - Stem cell research and religion In Exercise 8.18,...Ch. 8.2 - Fear of breast cancer A recent survey of 1000...Ch. 8.2 - Chicken breast In a 2014 Consumer Reports article...Ch. 8.2 - Same-sex marriage A national survey by the Pew...Ch. 8.2 - Exit poll predictions A national television...Ch. 8.2 - Exit poll with smaller sample In the previous...Ch. 8.2 - Simulating confidence intervals Repeat the...Ch. 8.2 - Simulating confidence intervals with poor coverage...Ch. 8.3 - Females ideal number of children The 2012 General...Ch. 8.3 - Males ideal number of children Refer to the...Ch. 8.3 - Using t-table Using Table B, the web app, software...Ch. 8.3 - Anorexia in teenage girls A study6 compared...Ch. 8.3 - Talk time on smartphones One feature smartphone...Ch. 8.3 - Heights of seedlings Exercise 8.7 reported heights...Ch. 8.3 - Buy it now Example 6 mentioned closing prices for...Ch. 8.3 - Time spent on e-mail When the GSS asked n = 1050...Ch. 8.3 - Grandmas using e-mail For the question about...Ch. 8.3 - Prob. 38PBCh. 8.3 - Prob. 39PBCh. 8.3 - Political views The General Social Survey asks...Ch. 8.3 - Prob. 41PBCh. 8.3 - Prob. 42PBCh. 8.3 - Effect of confidence level Find the margin of...Ch. 8.3 - Prob. 44PBCh. 8.3 - Number of children For the question, How many...Ch. 8.3 - Prob. 46PBCh. 8.4 - South Africa study The researcher planning the...Ch. 8.4 - Binge drinkers A study at the Harvard School of...Ch. 8.4 - Prob. 49PBCh. 8.4 - Prob. 50PBCh. 8.4 - Prob. 51PBCh. 8.4 - Farm size An estimate is needed of the mean...Ch. 8.4 - Prob. 53PBCh. 8.4 - Prob. 54PBCh. 8.4 - Prob. 55PBCh. 8.4 - Prob. 56PBCh. 8.4 - Prob. 57PBCh. 8.4 - Prob. 58PBCh. 8.5 - Why bootstrap? Explain the purpose of using the...Ch. 8.5 - Estimating variability Refer to Example 11 about...Ch. 8.5 - Bootstrap interval for the mean In 2014, the...Ch. 8.5 - Prob. 62PBCh. 8 - Unemployed college grads The U.S Bureau of the...Ch. 8 - Prob. 64CPCh. 8 - Prob. 65CPCh. 8 - Born again A poll of a random sample of n = 2000...Ch. 8 - Life after death The variable POSTLIFE in the 2012...Ch. 8 - Prob. 68CPCh. 8 - Prob. 69CPCh. 8 - Prob. 70CPCh. 8 - Prob. 71CPCh. 8 - Wife supporting husband Consider the statement...Ch. 8 - Legalize marijuana? The General Social Survey has...Ch. 8 - Prob. 74CPCh. 8 - Streaming A Harris Poll of 2300 U.S. adults...Ch. 8 - Prob. 76CPCh. 8 - Prob. 77CPCh. 8 - Grandpas using e-mail When the GSS asked in 2012,...Ch. 8 - Prob. 79CPCh. 8 - Prob. 80CPCh. 8 - Fuel efficiency The government website...Ch. 8 - Prob. 82CPCh. 8 - Prob. 83CPCh. 8 - Prob. 84CPCh. 8 - Prob. 85CPCh. 8 - Prob. 86CPCh. 8 - Prob. 87CPCh. 8 - Revisiting mountain bikes Use the Mountain Bike...Ch. 8 - Prob. 89CPCh. 8 - Prob. 90CPCh. 8 - Prob. 91CPCh. 8 - Prob. 92CPCh. 8 - Working mother In response to the statement on a...Ch. 8 - Miami spring break For a trip to Miami, Florida,...Ch. 8 - Prob. 95CPCh. 8 - Prob. 96CPCh. 8 - Prob. 97CPCh. 8 - Prob. 98CPCh. 8 - Prob. 99CPCh. 8 - Prob. 100CPCh. 8 - Kicking accuracy A football coach decides to...Ch. 8 - Prob. 103CPCh. 8 - Prob. 104CPCh. 8 - Prob. 106CPCh. 8 - Width of a confidence interval Why are confidence...Ch. 8 - Prob. 108CPCh. 8 - Prob. 109CPCh. 8 - Prob. 110CPCh. 8 - Prob. 111CPCh. 8 - Prob. 112CPCh. 8 - Prob. 113CPCh. 8 - Prob. 114CPCh. 8 - Prob. 115CPCh. 8 - Prob. 116CPCh. 8 - Prob. 117CPCh. 8 - Prob. 118CPCh. 8 - Prob. 119CPCh. 8 - Prob. 120CPCh. 8 - Prob. 121CPCh. 8 - Prob. 122CPCh. 8 - Prob. 123CPCh. 8 - Why called degrees of freedom? You know the sample...Ch. 8 - Prob. 125CPCh. 8 - Prob. 126CPCh. 8 - Median as point estimate When the population...
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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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