# Question: Suppose S0 100 r 0 06 S 0 4

Suppose S0 = 100, r = 0.06, σS = 0.4 and δ = 0. Use Monte Carlo to compute prices for claims that pay the following:

a. S21

b.√S1

c. S1-2

a. S21

b.√S1

c. S1-2

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Suppose that ln(S) and ln(Q) have correlation ρ =−0.3 and that S0 = $100, Q0 =$100, r = 0.06, σS = 0.4, and σQ = 0.2. Neither stock pays dividends. Use Monte Carlo to find the price today of claims that pay the ...Suppose that the processes for S1 and S2 are given by these two equations: dS1= α1S1dt + σ1S1dZ1 dS2 = α2S2dt + σ2S2dZ2 dQ = αQQdt + Q_ η1dZ1+ η2dZ2 Show that, to avoid arbitrage, Suppose that S follows equation (20.36) and Q follows equation (20.37). Use Itˆo’s Lemma to find the process followed by S2Q0.5. What is the value of a claim paying Q(T )−1S(T )? Check your answer using Proposition 20.4. Consider Joe and Sarah’s bet in Examples 21.2 and 21.3. a. In this bet, note that $106.184 is the forward price. A bet paying $1 if the share price is above the forward price is worth less than a bet paying $1 if the share ...Post your question