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Unformatted text preview: W 1 ( t ) + 2 ( t ) 2 d W 2 ( t ) o . ii) Consider a T-claim X 1 , 2 = ( S 1 ( T )-S 2 ( T )) + . Assume that the price of X 1 , 2 at time t is ( 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 dierential equation that F satises, as well as a hedging strategy ( 1 ( t ) , 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...
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This note was uploaded on 10/08/2010 for the course MA 503 taught by Professor Majin during the Fall '09 term at USC.
- Fall '09