Suppose that S1 and S2 follow geometric Brownian motion and pay continuous proportional dividends at the rates 1 and 2 Use the martingale argument to show that the value of a claim paying S1(T) if S1(T) KS2(T) is where 2 21 22 21, 212 and 1 and 2 are the dividend yields on the two stocks i)e...

We will evaluate a claim paying if We can write the payoff of the cla ...

Suppose that S1 and S2 follow geometric Brownian motion and pay continuous proportional dividends at the rates

Question:

Suppose that S1 and S2 follow geometric Brownian motion and pay continuous proportional dividends at the rates Î´1 and Î´2. Use the martingale argument to show that the value of a claim paying S1(T) if S1(T) > KS2(T) is

where Ïƒ2 = Ïƒ21 + Ïƒ22 ˆ’ 2Ï1, 2Ïƒ1Ïƒ2 and Î´1 and Î´2 are the dividend yields on the two stocks.

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...