# Question: Suppose that S follows equation 20 36 and Q follows equation

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).

Lemma to find the process followed by ln(SQ).

## Answer to relevant Questions

Suppose S(0) = $100, r = 0.06, σS = 0.4, and δ = 0. Use equation (20.32) to compute prices for claims that pay the following: a. S2 b.√S c. S−2 Compare your answers to the answers you obtained to Problem 19.6. What is the value of a claim paying Q(T )2S(T )? Check your answer using Proposition 20.4. Verify that S(t)e−δ(T−t)N(d1) satisfies the Black-Scholes equation. Assume the same bonds and numeraire as in the previous question. Suppose that P1/P3 is a martingale following a geometric Brownian process with annual standard deviation σ1= 0.10, and that P2/P3 is a martingale following a ...We now use Monte Carlo to simulate the behavior of the martingale Pt/St , with St as numeraire. Let x0 = P0(0, T )/S0. Simulate the process xt + h= (1+ σ√hZt+h)xtLet h be approximately 1 day. a. Evaluate S0E_ PT (T , T ...Post your question