Suppose that ln(S) and ln(Q) have correlation =0.3 and that S(0) = $100, Q(0) = $100,

Question:

Suppose that ln(S) and ln(Q) have correlation ρ =−0.3 and that S(0) = $100,
Q(0) = $100, r = 0.06, σS
= 0.4, and σQ
= 0.2. Neither stock pays dividends. Use
equation (20.38) to find the price today of claims that pay
a. SQ
b. S/Q
c.√SQ
d. 1/(SQ)
e. S2Q
Compare your answers to the answers you obtained to Problem 19.7.