Probability

Joined
Oct 20, 2021
Messages
2
Reaction score
0
Location
England
Consider 3-step binomial model with one asset with initial price S(0) = 100.
(a) For D = 0.9, U = 1.1 and p = 1 2 :
(i) Determine the distribution of the price S(t) for t = 1, 2, 3.
(ii) Compute the expected price E(S(t)) for t = 1, 2, 3.
(iii) Determine the distribution of the return K(t) for t = 1, 2, 3.
(iv) Compute the expected return E(K(t)) for t = 1, 2, 3.

(b) Suppose D = 0.9 and p = 1 2 . Determine all values of U > D for which the expected return E(K(3)) is:
(i) equal to 0;
(ii) smaller than 0;
(iii) bigger than 0.
(c) Let 0 < D < U. Find p ∈ [0, 1], expressed as a formula involving D and U, for which E(S(3)) = 100.

Let S1 and S2 be two risky assets each following a 2-step binomial model with uniform probability and parameters D1 = 10/11, U1 = 1.1 and D2 = 0.95, U2 = 1.05, respectively. In which asset it is more reasonable to invest? kindly explain your choice.
The solution of this problem should contain a statement saying which of the two assets is better supported by an argument containing suitable computations. The solution may not be unique.
 
I have no idea what your "D", "U", and "p" mean! Are they part of some formula you did not tell us about?
 

Members online

No members online now.

Forum statistics

Threads
2,530
Messages
9,859
Members
697
Latest member
lemon in icewine
Back
Top