What is process for x in the traditional risk neutral world

Assignment Help Financial Econometrics
Reference no: EM131241018

a. Suppose that an interest rate x follows the process

where a, x0, and c are positive constants. Suppose further that the market price of risk for x is λ. What is the process for x in the traditional risk-neutral world?

b. Prove that, when the security f provides income at rate q, equation (27.9) becomes 

Reference no: EM131241018

Questions Cloud

Assuming that paper is sold in competitive market : The supply of paper is described by the following equation Qs = 5,000P where Qs is tons supplied per year and P is the price per ton. The demand for paper is given by Qd = 400,000 – 3,000P Production of paper generates an externality of $20 per ton p..
Deduce the differential equation for a derivative : Deduce the differential equation for a derivative dependent on the prices of two nondividend-paying traded securities by forming a riskless portfolio consisting of the derivative and the two traded securities.
Identify and describe three management styles : Identify and describe three leadership styles and provide a comparison of the three styles. Select the management style and leadership style you will demonstrate as the associate warden of the Centervale Men's Prison and explain how and why you se..
What is the impact of the tax on welfare in this market : The supply of candy is given by Qs = 20,000P where Qs is bags of candy supplied per year and P is the price per bag. The demand for candy is given by Qd = 150,000 – 30,000P. Assuming that candy is sold in a competitive market, what is the equilibrium..
What is process for x in the traditional risk neutral world : Suppose further that the market price of risk for x is λ. -What is the process for x in the traditional risk-neutral world?
What is the value of the unlevered beta : The beta of the stock is 1.25, the marginal tax rate of the firm is 36%, and the debt equity ratio is 0.30. What is the value of the unlevered beta
Determine the moment needed at the base of 30-m-tall : Determine the moment needed at the base of 30-m-tall, 0.12-m-diameter flag pole to keep it in place in a 20 m/s wind.
What does statement imply about market price of risk : ‘‘The expected future value of an interest rate in a risk-neutral world is greater than it is in the real world.'' - What does this statement imply about the market price of risk for (a) an interest rate and (b) a bond price.
Faster growth than in the command economic system : Private ownership in the market system is believed to enhance innovation and faster growth than in the command economic system. With examples, explain why or why not this statement is true.

Reviews

Write a Review

Financial Econometrics Questions & Answers

  - what is the capital structure decision- how is the market

- what is the capital structure decision?- how is the market value of a company affected by its capital structure?- how

  Estimate expected number of times stock will bought or sold

Why did portfolio insurance not work well on October 19, 1987? - Estimate the expected number of times the stock will be bought or sold.

  Determine balance in each account and prepare a trail sheet

Prepare journal entries and record the following October transactions in the T-Accounts and key all entries with the number identifying the transaction. Determine the balance in each account and prepare a trail balance sheet as of October 31.

  What is the accounting break-even level of annual sales

A calculator costs $5 per unit to manufacture and sells for $20 per unit. If the plant lasts for three years and the cost of capital is 12%, what is the accounting break-even level of annual sales

  Which asset will have annual straight-line depreciation

A firm is considering purchasing two assets. Asset A will have a useful life of 10 years and cost $3 million; it will have installation costs of $400,000 but no salvage or residual value.

  Prepare the lower portion of the 2013 income statement

The following are partial income statement account balances taken from the December 31, 2013, year-end trial balance of White and Sons, Inc.: restructuring costs, $370,000; interest revenue, $47,000;

  Calculate present value of a perpetuity that makes a payment

Calculate the present value of a perpetuity that makes a payment of $1,000,000 every 6 months, with the next payment being made in exactly 6 months from now.

  Construct the balance sheet for gcp at the close of business

Construct the balance sheet for GCP at the close of business on Day 31. Remember, the employee's salaries will have been paid at the beginnings of the day for the previous 15 days of salaries they have worked

  Determine by how much must reserves be decreased

The Federal Reserve has decided that interest rates need to be increased to maintain low inflation in the economy. To accomplish this goal, the Fed has determined that the money supply needs to be decreased by $188 billion.

  Determine what is the npv of csm machine shop

CSM Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $492,000 is estimated to result in $191,000 in annual pretax cost savings.

  Determine who do qualify to purchase the property

You want to purchase a home for $239,950 and have saved enough for a 20 percent down payment. The mortgage interest rate is 5.25 percent with for a 30 year loan with monthly payments.

  Calculate the amount of the revised annual payment

A man has a 30-year loan with level end of year payments. The principal repaid in year 5 is 159.68 and in year 10 is 213.73. What is the payment - What was the nominal interest rate convertible quarterly for the last 2 years?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd