Assume that an asset's price S follows the stochastic diffusion process: dS = K(0-S)dt + 0S0.5...

 

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Assume that an asset's price S follows the stochastic diffusion process: dS = K(0-S)dt + 0S0.5 dz. and G = In(S). (a) Use Ito's lemma to derive an expression for dG. (b) What would you expect a set of long term simulated stock price trajectories simulated using this model to look like? Why (c) Suppose that K=0.9, one year from now? 125, So= 100, and o=0.25. What is the asset price's 99% VaR Assume that an asset's price S follows the stochastic diffusion process: dS = K(0-S)dt + 0S0.5 dz. and G = In(S). (a) Use Ito's lemma to derive an expression for dG. (b) What would you expect a set of long term simulated stock price trajectories simulated using this model to look like? Why (c) Suppose that K=0.9, one year from now? 125, So= 100, and o=0.25. What is the asset price's 99% VaR

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a Use It o s le mma to derive an expression for d G ANS WER d G S 0 5 d z 0 5 K S d t DER IV ING App lying It o s le mma d G d S S 0 5 2 d t d G K S d ... View the full answer