Why you think of alternative stochastic process make sense

Reference no: EM131926773

Problem

Suppose you are an execution trader. A client calls you with an order to cover a short position she entered at a price of 100. She gives you two exit conditions: profit-taking at 90 and stop-loss at 105.

(a) Assuming the client believes the price follows an O-U process, are these levels reasonable? For what parameters?

(b) Can you think of an alternative stochastic process under which these levels make sense?

Reference no: EM131926773

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