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Homework Set 7 (Spring2017).pdf

Homework Set 7 (Spring2017).pdf - Homework Set 7 STAT...

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Homework Set 7 STAT GU4265 & GR5265 – Stochastic Methods in Finance Irene Hueter 1. Derive the optimal choice L * of a barrier on the stock price for a perpetual American put as the value of L that maximizes the function h ( L ) = ( K - L ) · ( x L ) - 2 r σ 2 , where K is the strike, r is the constant short rate of interest, and σ is the volatility constant. Here, x is a place holder for the stock price. The assumption is that the stock price follows geometric Brownian motion. Show all your steps of the derivation. 2.-4. Solve the problems # 22.5, 22.7, 24.1 in the textbook by Bj¨
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