Unformatted text preview: dC = μ C C dt + σ C Cdw C where w C is a Brownian motion under some (subjective) probability. The Brownian motions may be correlated: assume dw D dw P = ρ DP dt, dw D dw C = ρ DC dt, dw P dw C = ρ PC dt, where ρ DP , ρ DC , and ρ PC are constant. (a) What is the value (to the dollar investor, at time t < T ) of the payoﬀ (1)? (Make your answer as explicit as possible.) (b) Describe a trading strategy for the dollar investor that replicates this payoﬀ. (Again, be as explicit as possible.) (c) Is a similar analysis possible if we use onefactor HJM models for the interest rates rather than HullWhite? [Extra credit: consider the analogous question for quanto call, whose value to the dollar investor is ( S ( T )K ) + at time T , where S is the price of a stock in pounds. This is of course the stochasticinterestrate analogue of our discussion of quantos, in Section 3 and problem 4 of HW2.] 1...
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 Fall '11
 Bayou
 Finance, Exchange Rate, Interest, Options, Foreign exchange market, United States dollar, dollar investor

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