Suppose that two assets S A and S B have stochastic differential equations dS t A,B rS t A,B dt A,B S t A,B dW t A,B where dW t A dW t B dt Derive the formula for the option that pays max at time T Suppose S 0 A S 0 B and A B What happens to the value of the option as goes to 100 B (SA SP,0) T...

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Suppose that two assets S A and S B have stochastic differential equations dS t A,B =

Question:

Suppose that two assets S_A and S_B have stochastic differential equations dS_t^A,B= rS_t^A,Bdt + σ A,B^S_t^A,B dW_t^A,Bwhere dW_t^A dW_tB = ρdt. Derive the formula for the option that pays max B (SA SP,0) T at time T. Suppose S₀^A = S₀^B and σ_A = σ_B. What happens to the value of the option as ρ goes to 100%?