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Unformatted text preview: MAFS 5030 Quantitative Modeling of Derivatives Securities Solution to Homework Three Course Instructor: Prof. Y.K. Kwok 1. F is generated by the partition P = {{ 3 , 2 } , { 1 , 1 } , { 2 , 3 }} . (i) Since { 2 , 3 } ∈ P and X (2) = 4 negationslash = X (3) = 9, X is not Fmeasurable. (ii) Since { 2 , 3 } ∈ P and X (2) = 2 negationslash = X (3) = 3, X is not Fmeasurable. Define the random variable X ( ω ) = max( ω, 3). Now, X ( ω ) = 3 for all ω ∈ Ω, hence X is Fmeasurable. 2. (a) Suppose F is generated by a partition P . It suffices to show that this property is valid for every B ∈ P . Consider E [ I B E [ X F ]] = summationdisplay ω ∈ B E [ X  B ] P ( ω ) = E [ X  B ] P ( B ) = summationdisplay ω ∈ B X ( ω )( P ( ω ) /P ( B )) P ( B ) = summationdisplay ω ∈ B X ( ω ) P ( ω ) = E [ XI B ] . (b) Recall E [ X F ] = J summationdisplay j =1 E [ X  B j ] 1 B j , and consider E [max( X 1 , ··· , X n ) F ] = J summationdisplay j =1 E [max( X 1 , ···...
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 Spring '11
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 Derivative, Trigraph, Max, yk, Prof. Y.K. Kwok, Modeling of Derivatives Securities

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