Homework Set 2 (Spring2017).pdf

# Homework Set 2 (Spring2017).pdf - Homework Set 2 STAT...

• Homework Help
• 1
• 100% (1) 1 out of 1 people found this document helpful

This preview shows page 1. Sign up to view the full content.

Homework Set 2 STAT GU4265 & GR5265 – Stochastic Methods in Finance Irene Hueter 1. Consider a one-step binomial model for two no-arbitrage assets X and Y with parameters 0 < d < 1 < u, and initial price X Y (0) = 1 . We cannot assume that the dollar prices of X and Y are correlated. (a) Find the price and the hedge of a contract V that pays off V 1 = max( X 1 , Y 1 ) . (b) Compute the price of the contract V using both martingale measures P Y and P X . ( Hint : In the case that there is no perfect hedge for this model, find the hedging portfolio that minimizes the variance of the difference between the value of the contract and the value of the hedging portfolio.) 2. Consider an American contract V that pays off max(6\$ τ , S τ ) = max(6 , S \$ ) · \$ τ at exercise time τ 2 in a two-step binomial model with parameters u = 2 , d = 1 2 , r = 1 4 , and S \$ = 4
This is the end of the preview. Sign up to access the rest of the document.
• Spring '16
• Yuchong Zhang

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern