Verify in Figure 17.2 that if volatility were 30% instead of 50%, immediate exercise would be optimal.
Answer to relevant QuestionsConsider the last row of Table 17.1. What is the solution for S*and S* when Ks = kr = 0? (This answer does not require calculation.) Repeat Problem 17.18 assuming that the volatility of gold is 20% and that once opened, the mine can be costlessly shut down forever. What is the value of the mine? What is the price at which the mine will be shut down? Consider the widget investment problem of Section 17.1 with the following modification. The expected growth rate of the widget price is zero. (This means there is no reason to consider project delay.) Each period, the widget ...Suppose x1∼ N(1, 5) and x2 ∼ N(−2, 2). The covariance between x1 and x2 is 1.3. What is the distribution of x1+ x2? What is the distribution of x1− x2? Assume S0 = $100, r = 0.05, σ = 0.25, δ = 0, and T = 1. Use Monte Carlo valuation to compute the price of a claim that pays $1 if ST > $100, and 0 otherwise. (This is called a cash-or-nothing call and will be further ...
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