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Exercise 7.7 Consider the American corporation ACME INC. The price pr.pdf

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Exercise 7.7 Consider the American corporation ACME INC. The price process S for ACME is of course denoted in dollars and has the P-dynamics dSt=Stdt+StdWt1 where and are known constants. The currency ratio euro/dollar is denoted by Y and Y has the dynamics dYt=Ytdt+YtdWt2 where W2 is independent of W1. The broker firm F&H has invented the derivative "Euler". The holder of a T-Euler will, at the time of maturity T, obtain the sum X=ln[ZT2] in euros. Here Zt is the price at time t in euros of the ACME stock. Compute the arbitrage free price (in euros) at time t of a T-Euler, given that the price (in euros) of the ACME stock is z. The euro short rate is denoted by r..

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Exercise 7.7 Consider the American corporation ACME INC. The price process S for ACME is of course denoted in dollars and has the P-dynamics dSt=Stdt+StdWt1 where and are known constants. The currency ratio euro/dollar is denoted by Y and Y has the dynamics dYt=Ytdt+YtdWt2 where W2 is independent of W1. The broker firm F&H has invented the derivative "Euler". The holder of a T-Euler will, at the time of maturity T, obtain the sum X=ln[ZT2] in euros. Here Zt is the price at time t in euros of the ACME stock. Compute the arbitrage free price (in euros) at time t of a T-Euler, given that the price (in euros) of the ACME stock is z. The euro short rate is denoted by r.

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  • 1. Exercise 7.7 Consider the American corporation ACME INC. The price process S for ACME is of course denoted in dollars and has the P-dynamics dSt=Stdt+StdWt1 where and are known constants. The currency ratio euro/dollar is denoted by Y and Y has the dynamics dYt=Ytdt+YtdWt2 where W2 is independent of W1. The broker firm F&H has invented the derivative "Euler". The holder of a T-Euler will, at the time of maturity T, obtain the sum X=ln[ZT2] in euros. Here Zt is the price at time t in euros of the ACME stock. Compute the arbitrage free price (in euros) at time t of a T-Euler, given that the price (in euros) of the ACME stock is z. The euro short rate is denoted by r.