What is the interest rate and what is the volatility

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We consider a Brownian motion (Wt)t?[0,1].

(1) Compute the expectation and the variance of W1/2 + W1.

(2) We consider a Black-Scholes model such that the bond price is given by Bt= e.1t and the stock price is given by St = 100e.2t+.5Wt . What is the initial stock price?

What is the interest rate? What is the volatility?

(3) With the help of a table of normal distribution, give an approximation (with error at most 0.01) of the probability that the stock price is larger at time 1 than it is a at time 0.

Reference no: EM132003310

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