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Unformatted text preview: tial NOT of the drift but rather of the "augmented" drift. Assume that the an nualized volatility
is 0.35. (In the following problems, use 3 mon ths = 0.25 years.) FM5002−HW12−5.2.12.nb 5 a . Fin d the an nual drift.
b. Fin d the 3 − month volatility.
c. Find the 3 − mon th drift. ex a. Let x be the ann ual drift . Then E S1
b. The 3 month volatility is 0.35 1 2 0.35 2 1.02, so that x 0.0414474. 0.175. 4
c. The 3 mon th drift is 0.0414474
4 0.00103618. 0060− . We analyze a particular stock over a time interval that starts today, an d exten ds 100 days in to the future. Assume that
the curren t price is $5 per share. Assume that the ann ualized drift is 2.5 %, that the an n ualized volatility is 40 %. Use the 70 −
30 400 − subperiod CRR model.
a. Fin d the 6 hour uptick an d down tick factors that calibrate to the above data.
b. Write a summation expression with bin omial coefficien ts for the expected price of...
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- Spring '08