Questions from Business Statistics

Q: Suppose that the risk-free zero curve is flat at 7

Suppose that the risk-free zero curve is flat at 7% per annum with continuous compounding and that defaults can occur halfway through each year in a new 5-year credit default swap. Suppose that the re...

Q: If a stock price follows geometric Brownian motion, what process does

If a stock price follows geometric Brownian motion, what process does
follow where
is the arithmetic average stock price between time zero and time t?

Q: Answer the following questions about compound options: (a)

Answer the following questions about compound options: (a) What put–call parity relationship exists between the price of a European call on a call and a European put on a call? Show that the formulas...

Q: Does a down-and-out call become more valuable or

Does a down-and-out call become more valuable or less valuable as we increase the frequency with which we observe the asset price in determining whether the barrier has been crossed? What is the answe...

Q: Explain why a regular European call option is the sum of a

Explain why a regular European call option is the sum of a down-and-out European call and a down-and-in European call. Is the same true for American call options?

Q: In a 3-month down-and-out call option

In a 3-month down-and-out call option on silver futures the strike price is $20 per ounce and the barrier is $18. The current futures price is $19, the risk-free interest rate is 5%, and the volatilit...

Q: Consider a chooser option where the holder has the right to choose

Consider a chooser option where the holder has the right to choose between a European call and a European put at any time during a 2-year period. The maturity dates and strike prices for the calls and...

Q: Suppose that the strike price of an American call option on a

Suppose that the strike price of an American call option on a non-dividend-paying stock grows at rate g. Show that if g is less than the risk-free rate, r, it is never optimal to exercise the call ear...

Q: How can the value of a forward start put option on a

How can the value of a forward start put option on a non-dividend-paying stock be calculated if it is agreed that the strike price will be 10% greater than the stock price at the time the option start...

Q: Use a three-time-step tree to value an American

Use a three-time-step tree to value an American floating lookback call option on a currency when the initial exchange rate is 1.6, the domestic risk-free rate is 5% per annum, the foreign risk-free in...