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Digital caplets Consider two possible candidates (I) and (II) for the risk-neutral distribution of LT conditional on LtT. Both are distributions with respect to the numeraire Z (t, T + α).
(a) Assuming no-arbitrage, what is the value of μ?
(b) Calculate the price at time t of the digital caplet that pays α at time (T + α) if LT > K, and zero otherwise, under the two different models (I) and (II).
(c) Calculate the vega of this digital caplet under the two models (I) and (II) - where vega is defined as for (II). For what values of K does the digital caplet have zero vega, for (I) and (II) respectively?
(d) What are the prices of the at-the-money-forward digital caplet for (I) and (II)? Explain your answers in terms of the median of lognormal and normal distributions.
Lexus. is considering an investment of $383,000 in an asset with an economiclife of 5 years. The firm estimates that the nominalannual cash revenuesand expenses at the end of the first year will be $263,000 and $88,000
Assume that a specialty group has the following cost structure and that the group expects to perform 7,500 procedures in the coming year: Fixed costs $500,000 Variable Cost per procedure $25
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Each of us will get pleasure worth a 3 from her success (no matter n'ho helps her). But each one who goes to help will bear a cost of1, this being the r-alue of our time taken up in helping. set this up as a game.
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First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually.
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