Unformatted text preview: W 1 ( t ) + π 2 ( t ) σ 2 d ¯ W 2 ( t ) o . ii) Consider a Tclaim X 1 , 2 = ( S 1 ( T )S 2 ( T )) + . Assume that the price of X 1 , 2 at time t is Π( t, X 1 , 2 ) = F ( t,S 1 ( t ) ,S 2 ( t )), for all t ≥ 0, where F is a smooth deterministic function. Applying the pricing principle to derive the diﬀerential equation that F satisﬁes, as well as a hedging strategy ( π 1 ( t ) ,π 2 ( t )) in terms of the function F . iii) Is it possible to reduce the state space for this problem? If so, carry it out. 1...
View
Full Document
 Fall '09
 MAJIN
 Math, Brownian Motion, Following, standard Brownian motions.

Click to edit the document details