What is the value of a claim paying Q(T )2S(T )? Check your answer using Proposition 20.4.
Answer to relevant QuestionsWhat is the value of a claim paying Q(T )−1S(T )? Check your answer using Proposition 20.4. Assuming that the stock price satisfies equation (20.20), verify that Ke−r(T−t) + S(t)e−δ(T−t) satisfies the Black-Scholes equation, where K is a constant. What is the boundary condition for which this is a ...Repeat the previous problem assuming that δ1= 0.05 and δ2 = 0.12. Verify that both procedures give a price of approximately $15.850. Suppose that S1 and S2 follow geometric Brownian motion and pay continuous proportional dividends at the rates δ1 and δ2. Use the martingale argument to show that the value of a claim paying S1(T ) if S1(T) > KS2(T ) ...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 ...
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