You are offered the opportunity to receive for free the payoff [Q(T ) − F0,T (Q)]× max[0, S(T ) − K]
Answer to relevant QuestionsAn agricultural producer wishes to insure the value of a crop. Let Q represent the quantity of production in bushels and S the price of a bushel. The insurance payoff is therefore Q(T ) × V [S(T ), T ], where V is the price ...Verify that e−r(T−t)N(d2) 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 ...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 ...For the lookback put: a. What is the value of a lookback put if ST = 0? Verify that the formula gives you the same answer. b. Verify that at maturity the value of the put is ST − ST .
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