Under the social security system in the United States, workers pay taxes and receive a monthly annuity after retirement. Some have argued that the United States should invest the social security tax proceeds in stocks. The rationale is that, over time, there is a decreasing probability that stocks will underperform bonds. The social security system would thus benefit from the higher expected return on stocks. Making use of the put-pricing discussion in Section 22.6, comment on this proposal.
Answer to relevant QuestionsWarren Buffett stated in the 2009 Letter to Shareholders: "Our derivatives dealings require our counterparties to make payments to us when contracts are initiated. Berkshire therefore always holds the money, which leaves us ...In this problem we will use Monte Carlo to simulate the behavior of the martingale St/Pt , with Pt as numeraire. Let x0 = S0/P0(0, T ). Simulate the process xt+h= (1+ σ√ hZt+h)xt Let h be approximately 1 day. a. Evaluate ...Covered call writers often plan to buy back the written call if the stock price drops sufficiently. The logic is that the written call at that point has little “upside,” and, if the stock recovers, the position could ...Verify that equation (23.14) (for both cases K >H and K In this problem you will compute January 12 2004 bid and ask volatilities (using the Black-Scholes implied volatility function) for 1-year IBM options expiring the following January. Note that IBM pays a dividend in March, ...
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