Assume that one stock follows the process dS S dt dZ (20 44) Another stock follows the process dQ Q Qdt dZ dq1 dq2 (20 45) a If there were no jump terms (i e , 1 2 0), what would be the relation between and Q b Suppose there is just one jump term (2 0) and that Y1 1 In words, what does it mean to h...

As mentioned in the problem d Z appears in both dS and dQ One can think of dQ as an alternative mode ...

Assume that one stock follows the process dS/S = dt + dZ (20.44) Another stock follows the

Question:

Assume that one stock follows the process dS/S = αdt + σdZ (20.44)
Another stock follows the process dQ/Q = αQdt + σdZ + dq1+ dq2 (20.45)
a. If there were no jump terms (i.e., λ1 = λ2 = 0), what would be the relation between α and αQ?
b. Suppose there is just one jump term (λ2 = 0) and that Y1> 1. In words, what does it mean to have Y1> 1? What can you say about the relation between α and αQ?
c. Write an expression for αQ when both jump terms are nonzero. Explain intuitively why αQ might be greater or less than α.