Question: Q. a) Explain why if all the State variables in a Merton Model are all functions of the asset returns the solution method does not

Q. a) Explain why if all the State variables in a Merton Model are all functions of the asset returns the solution method does not need to be dynamic programming.

b) Explain Briefly why a call option for a stock written to pay off versus an index value would not have a valuation which depended on a specific interest rate model.

c) Explain Briefly why more than one pricing kernel could exist in an economy.

d) Assume consumption can be related to the return on the standard portfolio and an uncorrelated factor portfolio. Show the CCAMP formulation and the ICAPM formulation are compatible.

e) Explain how a Feynman-Kac solution avoids the need to solve the differential equation in the Black-Scholes model.

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