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Unformatted text preview: FINM345/STAT390 Stochastic Calculus – Hanson – Autumn 2009 Lecture 8 Homework (HW8): More Merton Option Pricing and JD Financial Applications (Due by Lecture 8 in Chalk FINM345 Assignment Submenu) { Note: Dropped the Digital Dropbox } You must show your work, code and/or worksheet for full credit. There are 10 points per question if correct answer and negative points for missing homework sets. Corrections are in Red as are comments, November 15, 2009 1. Computation Using Merton’s (1976) JumpDiffusion Model for European Options: Compute the European call and put option prices for the following model: dS ( t ) = S ( t ) · (( μ νλ ) · dt + σ · dW ( t )) + dP ( t ) X i =1 S ( T i ) ν i , where here ν is an IID random variable (i.e., the jumpamplitude is its own mark, which in Merton’s 1976 model is lognormally distributed), T i is the i th jumptime with jumpamplitude ν i , μ = μ + νλ here is the total jumpdiffusion mean rate coefficient, σ is just the diffusion volatility coefficient, and λ is the number of jumps...
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This note was uploaded on 04/19/2010 for the course FIN 390 taught by Professor Hansen during the Fall '09 term at University of Illinois, Urbana Champaign.
 Fall '09
 Hansen

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