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Arithmetic brownian motion-find the distribution

Assignment Help Basic Computer Science
Reference no: EM133070027

Question I:

Let {X(t),t≥ 0} be an arithmetic Brownian motion with a drift factor of 0.35 and a volatility of 0.43. Given that X4 = 2.

(a) Find the distribution of X(13).

(b) What is the probability that X(13) >9.

(c) Find the confidence interval of X(13) at level 90%.

Question II:

(a) Show that the probability that a European call option will be exercised in a risk-neutral world, with the notation introduced in the BSM chapter, is equal to N(d2).

b) At time T, find an expression for the value of a derivative that pays off $100 if ST > K? (c) What is the value of this security at time zero using risk-neutral valuation.

Question III:

We assume that the stock price at time t, St, has a LogNormal model with S0 = 100, µ = 0.08 and σ = 0.3. It is assumed that the stock pays no dividend.

(a) Find P (S1 ≥ 105).

(b) Find P (S1 <98).

(c) Let Kt = S0ert, compute P (St ≥ Kt).

Question IV:

Find the price of a 3-month European put option on a non-dividend-paying stock with a strike price of $50 when the current stock price is $50, the risk-free interest rate is 10% and the volatility is 30% per annum.

Reference no: EM133070027

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