3. Consider a stock that pays dividends of a fraction & of the stock price at...
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3. Consider a stock that pays dividends of a fraction & of the stock price at discrete times T₁, T2, T3,..., then the stock price at time t is given by St= (1-6)n[t] Soet+oWt, where n[t] is the number of dividends paid by time t. Suppose that the dividends are re-invested in the stock, then the tradable will be the portfolio of the stock and the reinvested dividends, Zt = (1-6)-n[t] St. (a) Find a measure Q which makes the discounted Z, a martingale. (b) Find the fair price of the stock at time T. (c) Find the price of a forward contract on the stock. 3. Consider a stock that pays dividends of a fraction & of the stock price at discrete times T₁, T2, T3,..., then the stock price at time t is given by St= (1-6)n[t] Soet+oWt, where n[t] is the number of dividends paid by time t. Suppose that the dividends are re-invested in the stock, then the tradable will be the portfolio of the stock and the reinvested dividends, Zt = (1-6)-n[t] St. (a) Find a measure Q which makes the discounted Z, a martingale. (b) Find the fair price of the stock at time T. (c) Find the price of a forward contract on the stock.
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Answer rating: 100% (QA)
SOLUTION To find the measure Q that makes the discounted Zt a martingale we need to find the process Zt under the measure Q and then verify if it is a martingale a Lets define the measure Q as the ris... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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