Statistical Reasoning for Everyday Life (5th Edition)
5th Edition
ISBN: 9780134494043
Author: Jeff Bennett, William L. Briggs, Mario F. Triola
Publisher: PEARSON
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Chapter 9.2, Problem 10E
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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 9 Solutions
Statistical Reasoning for Everyday Life (5th Edition)
Ch. 9.1 - Hypotheses and Hypothesis Tests. What is a...Ch. 9.1 - Null and Alternative Hypotheses. What is a mill...Ch. 9.1 - Hypothesis Test Outcomes. What are the two...Ch. 9.1 - P-Value. What is a P-value for a hypothesis?Ch. 9.1 - Does It Make Sense? For Exercises 512, determine...Ch. 9.1 - Does It Make Sense? For Exercises 512, determine...Ch. 9.1 - Significance. The results of my hypothesis test...Ch. 9.1 - Does It Make Sense? For Exercises 512, determine...Ch. 9.1 - Does It Make Sense? For Exercises 512, determine...Ch. 9.1 - Does It Make Sense? For Exercises 512, determine...
Ch. 9.1 - Prob. 11ECh. 9.1 - Does It Make Sense? For Exercises 512, determine...Ch. 9.1 - What Is Significant? In testing a method of gender...Ch. 9.1 - What Is Significant? In testing a method of gender...Ch. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Prob. 19ECh. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Formulating Hypotheses. In Exercises 1522, state...Ch. 9.1 - Drawing a Conclusion from a Hypothesis Test. If we...Ch. 9.1 - Drawing a Conclusion from a Hypothesis Test. If we...Ch. 9.1 - Drawing a Conclusion from a Hypothesis Test. If we...Ch. 9.1 - Drawing a Conclusion from a Hypothesis Test. If we...Ch. 9.1 - Drawing a Conclusion from a Hypothesis Test. If we...Ch. 9.1 - Drawing a Conclusion from a Hypothesis Test. If we...Ch. 9.2 - Notation. Briefly describe what each of the...Ch. 9.2 - Standard Score. When testing a claim about a...Ch. 9.2 - Critical Values. What do we mean by critical...Ch. 9.2 - Prob. 4ECh. 9.2 - Prob. 5ECh. 9.2 - Prob. 6ECh. 9.2 - Does It Make Sense? For Exercises 512, determine...Ch. 9.2 - Prob. 8ECh. 9.2 - Prob. 9ECh. 9.2 - Prob. 10ECh. 9.2 - Prob. 11ECh. 9.2 - Prob. 12ECh. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using Critical Values to Reject or Not Reject. In...Ch. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Prob. 27ECh. 9.2 - Prob. 28ECh. 9.2 - Using P-Values to Reject or Not Reject. In...Ch. 9.2 - Prob. 30ECh. 9.2 - Prob. 31ECh. 9.2 - Prob. 32ECh. 9.2 - Prob. 33ECh. 9.2 - Prob. 34ECh. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Prob. 38ECh. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Prob. 41ECh. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Hypothesis Tests for Means. For Exercises 3548,...Ch. 9.2 - Prob. 44ECh. 9.2 - Prob. 45ECh. 9.2 - Prob. 46ECh. 9.2 - Prob. 47ECh. 9.2 - Prob. 48ECh. 9.2 - Prob. 49ECh. 9.2 - Type I and Type II Errors. In Exercises 4952, a...Ch. 9.2 - Prob. 51ECh. 9.2 - Prob. 52ECh. 9.3 - Notation. What do n, p, p, and P-value represent?Ch. 9.3 - Standard Score. When testing a claim about a...Ch. 9.3 - Prob. 3ECh. 9.3 - P-Value. A P-value of 0.00001 is obtained when...Ch. 9.3 - Prob. 5ECh. 9.3 - Prob. 6ECh. 9.3 - Prob. 7ECh. 9.3 - Does It Make Sense? For Exercises 59, determine...Ch. 9.3 - Prob. 9ECh. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Prob. 11ECh. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Prob. 16ECh. 9.3 - Prob. 17ECh. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9.3 - Hypothesis Tests for Population Proportions. For...Ch. 9 - A random sample of 40 quarters minted after 1964...Ch. 9 - In a study of smokers who tried to quit smoking...Ch. 9 - Finding a Job Through Networking. In a survey of...Ch. 9 - A medical student wants to test the claim that...Ch. 9 - Identify the null and alternative hypotheses for...Ch. 9 - Identify the null and alternate hypotheses for...Ch. 9 - Identify the null and alternative hypotheses for...Ch. 9 - Prob. 4CQCh. 9 - Prob. 5CQCh. 9 - Prob. 6CQCh. 9 - In Exercises 510, assume that we want to use a...Ch. 9 - Prob. 8CQCh. 9 - In Exercises 510, assume that we want to use a...Ch. 9 - Prob. 10CQ
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