# Question

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 following:

a. S1 Q1

b. S1/Q1

c. √S1 Q1

d. 1/(S1Q1)

e. S21 Q1

a. S1 Q1

b. S1/Q1

c. √S1 Q1

d. 1/(S1Q1)

e. S21 Q1

## Answer to relevant Questions

Assume that the market index is 100. Show that if the expected return on the market is 15%, the dividend yield is zero, and volatility is 20%, then the probability of the index falling below 95 over a 1-day horizon is ...Suppose that S1 follows equation (20.26) with δ = 0. Consider an asset that follows the process dS2 = α2S2 dt − σ2S2 dZ Show that (α1 − r)/σ1=−(α2 − r)/σ2. S1 and S2 that eliminates risk.) Suppose that S follows equation (20.36) and Q follows equation (20.37). Use Itˆo’s Lemma to find the process followed by ln(SQ). You are offered the opportunity to receive for free the payoff [Q(T ) − F0,T (Q)]× max[0, S(T ) − K] Consider again the bet in Example 21.3. Suppose the bet is S − $106.184 if the price is above $106.184, and $106.184 − S if the price is below $106.184. What is the value of this bet to each party? Why?Post your question

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