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Problem 5
Consider a call option C(S, t) on a non-dividend paying stock. The stock follows the process
dS(t)
= 0.15dt + 0.35dZ(t)
S(t)
where {Z(t)} is a Brownian motion. The call option follows the process
dC(S, t)
= 0.37dt + C dZ(t),
C(S, t)
The risk free rate is 0.05.
Determine C
Problem 6
A contract will give you one share of stock at the end of a year if the price of the stock is less than 45
at that time.
You are given:
(i) The stock follows the process
dS(t)
= 0.14 dt + 0.18 dZ(t)
S(t)
(ii) S(0) = 55
(iii) The continuously compounded dividend rate is 3%.
(iv) The continuously compounded risk free rate is 5%.
Calculate the value of the contract.
Problem 7
The time-t price of a non-dividend paying stock is S(t). S(t) follows an arithmetic Brownian motion
with = 0.15, = 0.25.
The time-t price of an exotic option on the stock is C(t). The partial derivatives of C(t) are:
2C
C
C
= 0.6,
= 0.08,
= 0.12
2
S
S
t
Determine the drift and the volatility of the Ito process followed by C.
Problem 8
The stochastic process X(t) can be expressed as
X(t) = (tZ(t))2 + 4 t3 Z(t)
Using Itos lemma, express dX(t) in terms of dt and dZ(t).
Problem 9
For an option on a stock, you are given
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(B) 26.56
(C) 33.34
(D) 37.77
(E) 44.80
Problem 10
For two options on a non-dividend paying stock following the Black-Scholes framework, you are given:
Option
Option Premium
2.95
0.3200
1.08
0.030
-0.007
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