Discrete Mathematics with Graph Theory (Classic Version) (3rd Edition) (Pearson Modern Classics for Advanced Mathematics Series)
3rd Edition
ISBN: 9780134689555
Author: Edgar Goodaire, Michael Parmenter
Publisher: PEARSON
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Textbook Question
Chapter 8.3, Problem 6TFQ
(Answers can be found in the back of the book.)
If the list 2, 5, 4, 1 is sorted using the Bubble Sort Algorithm, the first time the list changes it becomes 2, 4, 5, 1.
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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?
The Course Name Real Analysis please Solve questions by Real Analysis
Chapter 8 Solutions
Discrete Mathematics with Graph Theory (Classic Version) (3rd Edition) (Pearson Modern Classics for Advanced Mathematics Series)
Ch. 8.1 - Prob. 1TFQCh. 8.1 - Prob. 2TFQCh. 8.1 - Prob. 3TFQCh. 8.1 - Prob. 4TFQCh. 8.1 - Prob. 5TFQCh. 8.1 - Prob. 6TFQCh. 8.1 - Prob. 7TFQCh. 8.1 - Prob. 8TFQCh. 8.1 - Prob. 9TFQCh. 8.1 - Prob. 10TFQ
Ch. 8.1 - Prob. 1ECh. 8.1 - Prob. 2ECh. 8.1 - Prob. 3ECh. 8.1 - Prob. 4ECh. 8.1 - Prob. 5ECh. 8.1 - Prob. 6ECh. 8.1 - Prob. 7ECh. 8.1 - Prob. 8ECh. 8.1 - Prob. 9ECh. 8.1 - Prob. 10ECh. 8.1 - Prob. 11ECh. 8.1 - Prob. 12ECh. 8.1 - Prob. 13ECh. 8.1 - Prob. 14ECh. 8.1 - Prob. 15ECh. 8.1 - Prob. 16ECh. 8.1 - Prob. 17ECh. 8.1 - Prob. 18ECh. 8.1 - Prob. 19ECh. 8.1 - Prob. 20ECh. 8.2 - Prob. 1TFQCh. 8.2 - Prob. 2TFQCh. 8.2 - Prob. 3TFQCh. 8.2 - Prob. 4TFQCh. 8.2 - Prob. 5TFQCh. 8.2 - Prob. 6TFQCh. 8.2 - Prob. 7TFQCh. 8.2 - Prob. 8TFQCh. 8.2 - Prob. 9TFQCh. 8.2 - Prob. 10TFQCh. 8.2 - Prob. 1ECh. 8.2 - Prob. 2ECh. 8.2 - Prob. 3ECh. 8.2 - 4. Find an algorithm for finding the smallest...Ch. 8.2 - Prob. 5ECh. 8.2 - 6. (a) [BB] Justify the statement made in...Ch. 8.2 - Prob. 7ECh. 8.2 - Prob. 8ECh. 8.2 - Prob. 9ECh. 8.2 - Prob. 10ECh. 8.2 - Prob. 11ECh. 8.2 - Prob. 12ECh. 8.2 - Prob. 13ECh. 8.2 - Prob. 14ECh. 8.2 - Prob. 15ECh. 8.2 - Prob. 16ECh. 8.2 - Prob. 17ECh. 8.2 - Prob. 18ECh. 8.2 - Prob. 19ECh. 8.2 - Prob. 20ECh. 8.2 - Prob. 21ECh. 8.2 - Prob. 22ECh. 8.2 - Prob. 23ECh. 8.2 - Prob. 24ECh. 8.2 - Prob. 25ECh. 8.2 - The Russian peasant method is used to multiply two...Ch. 8.2 - Prob. 27ECh. 8.2 - Prob. 28ECh. 8.3 - Prob. 1TFQCh. 8.3 - Prob. 2TFQCh. 8.3 - (Answers can be found in the back of the book.)...Ch. 8.3 - Prob. 4TFQCh. 8.3 - Prob. 5TFQCh. 8.3 - (Answers can be found in the back of the book.)
6....Ch. 8.3 - Prob. 7TFQCh. 8.3 - Prob. 8TFQCh. 8.3 - Prob. 9TFQCh. 8.3 - Prob. 10TFQCh. 8.3 - Prob. 1ECh. 8.3 - Prob. 2ECh. 8.3 - Describe a ternary search algorithm, which...Ch. 8.3 - Prob. 4ECh. 8.3 - Prob. 5ECh. 8.3 - Prob. 6ECh. 8.3 - Prob. 7ECh. 8.3 - Prob. 8ECh. 8.3 - Prob. 9ECh. 8.3 - Prob. 10ECh. 8.3 - Prob. 11ECh. 8.3 - Prob. 12ECh. 8.3 - Prob. 13ECh. 8.3 - Prob. 14ECh. 8.3 - Prob. 15ECh. 8.3 - Prob. 16ECh. 8.3 - Prob. 17ECh. 8.3 - [BB] Show the steps involved in the application of...Ch. 8.3 - Prob. 19ECh. 8.3 - The Binary search Algorithm we have presented...Ch. 8.3 - Prob. 21ECh. 8.3 - Prob. 22ECh. 8.3 - Prob. 23ECh. 8.3 - Prob. 24ECh. 8.3 - Prob. 25ECh. 8.3 - Prob. 26ECh. 8.4 - (Answers can be found in the back of the book.)
1....Ch. 8.4 - Prob. 2TFQCh. 8.4 - Prob. 3TFQCh. 8.4 - Prob. 4TFQCh. 8.4 - Prob. 5TFQCh. 8.4 - Prob. 6TFQCh. 8.4 - Prob. 7TFQCh. 8.4 - Prob. 8TFQCh. 8.4 - Prob. 9TFQCh. 8.4 - Prob. 10TFQCh. 8.4 - Prob. 1ECh. 8.4 - Use the procedure outlined in this section to list...Ch. 8.4 - Prob. 3ECh. 8.4 - Prob. 4ECh. 8.4 - Prob. 5ECh. 8.4 - Prob. 6ECh. 8.4 - Prob. 7ECh. 8.4 - 8. (a) List, in the lexicographic order, the...Ch. 8.4 - Prob. 9ECh. 8.4 - Prob. 10ECh. 8.4 - Prob. 11ECh. 8.4 - Prob. 12ECh. 8 - Describe how Horners Algorithm evaluates f(x) when...Ch. 8 - Prob. 2RECh. 8 - 3. Let be an integer, let , and let be a subset of...Ch. 8 - Suppose we want an algorithm that, for an input of...Ch. 8 - Prob. 5RECh. 8 - Prob. 6RECh. 8 - Prob. 7RECh. 8 - Prob. 8RECh. 8 - (Requires a little knowledge of calculus) Show...Ch. 8 - Prob. 10RECh. 8 - Prob. 11RECh. 8 - 12. Sort the list 9,-3,1,0,-4,5,3 into increasing...Ch. 8 - 13. In the lexicographic ordering of all...Ch. 8 - Prob. 14RE
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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? 2arrow_forwardQuestion 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_forward
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