ass3_W2012

# ass3_W2012 - STAT/ACTSC 446/846 Assignment #3 (due March 6,...

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Unformatted text preview: STAT/ACTSC 446/846 Assignment #3 (due March 6, 2012) (1) Using a three-period binomial model, calculate the value a 3-month American call option on a dividend-paying stock with current price \$10 and exercise price of \$10. The dividend is due at the end of the first month and is equal to \$0.50. The volatility of the stock is 15%, and the continuously compounded risk-free interest rate is 4% per year for bonds with maturity less than or equal to 1 month and 4.5% for bonds with maturity longer than 1 month. (2) Let us define a stochastic process X t = √ tW , where W ∼ N (0 , 1). Answer the following: (a) Does this process have continuous trajectories? (b) What are the marginal distributions of the process (i.e., what is the distribution of X t for t > 0)? (c) Is { X t } a Brownian motion? Explain your answers. (3) Let { B t } t ≥ be standard Brownian motion. Which of the following are Brownian motions?...
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## This note was uploaded on 03/05/2012 for the course ACTSC 446 taught by Professor Adam during the Winter '09 term at Waterloo.

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ass3_W2012 - STAT/ACTSC 446/846 Assignment #3 (due March 6,...

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