ESSENTIALS OF STATISTICS-W/APLIA
ESSENTIALS OF STATISTICS-W/APLIA
4th Edition
ISBN: 9781305611177
Author: HEALEY
Publisher: CENGAGE L
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Chapter P, Problem 2E

Exercises

You can use the following problems as a self-test on the material presented in this review. If you can handle these problems, you’re ready to do all of the arithmetic in this text. If you have difficulty with any of these problems, please review the appropriate section of this prologue. You might also want to use this section as an opportunity to become more familiar with your calculator. The answers are given immediately following these exercises, along with commentary and some reminders.

For the set of scores ( X i ) of 50, 55, 60, 65, and 70, evaluate each of the following expressions:

X i =

X i 2 =

( X i ) 2 =

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Question 2. An American option on a stock has payoff given by F = f(St) when it is exercised at time t. We know that the function f is convex. A person claims that because of convexity, it is optimal to exercise at expiration T. Do you agree with them?
Question 4. We consider a CRR model with So == 5 and up and down factors u = 1.03 and d = 0.96. We consider the interest rate r = 4% (over one period). Is this a suitable CRR model? (Explain your answer.)
Question 3. We want to price a put option with strike price K and expiration T. Two financial advisors estimate the parameters with two different statistical methods: they obtain the same return rate μ, the same volatility σ, but the first advisor has interest r₁ and the second advisor has interest rate r2 (r1>r2). They both use a CRR model with the same number of periods to price the option. Which advisor will get the larger price? (Explain your answer.)

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