HW 5 .pdf - MATH 472 Homework 5 Fall 2017 Due 13:00 on...

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MATH 472: Homework 5 Fall 2017 Due 13:00 on Thursday, November 16. Instructions Unless stated otherwise, all exercises and computer problems are from our textbook Numerical Analysis (second edition) by Timothy Sauer. All results have to be justified by appropriate intermediate steps and/or arguments . Only com- plete and clear solutions will receive full credit. Regarding the computer problems, print the .m files as well as the results that you obtain. If you need to provide any additional comments on the printing, they can be handwritten. Problems A European call option is a financial contract the gives its holder the right to buy one share of stock at strike price K at maturity T . The famous Black Scholes formula gives the price of such a contract under the Black Scholes model. In this model, the price process for the stock is assumed to solve a specific stochastic differential equations starting from S at time 0 . Using this differential equation one can show that

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