MathematicalModels
posted by RVE .
Consider the BlackScholesMerton model for two stocks:
dS1(t)=0.1S1(t)dt+0.2S1(t)dW1(t)
dS2(t)=0.05S2(t)dt+0.1S2(t)dW2(t)
Suppose the correlation between W1 and W2 is 0.4. Consider the dynamics of the ratio S1/S2, where A,B,C,D,F,G,I,J,K,L are constants to be found:
d(S1(t)/S2(t))=(ASB1(t)+C)SD2(t)dt+FSG1(t)SI2(t)dW1(t)+JSK1(t)SL2(t)dW2(t)
Hint: it may help to write down first the explicit expression for the ratio.
Enter the value of A:
correct
0.05
Enter the value of B:
correct
1
Enter the value of C:
correct
0
Enter the value of D:
correct
−1
Enter the value of F:
correct
0.2
Enter the value of G:
correct
1
Enter the value of I:
correct
−1
Enter the value of J:
correct
−0.1
Enter the value of K:
correct
1
Enter the value of L:
correct
−1

Please help me with this variation:
Consider the BlackScholesMerton model for two stocks:
dS1(t)=0.1S1(t)dt+0.2S1(t)dW1(t)
dS2(t)=0.05S2(t)dt+0.1S2(t)dW2(t)
Suppose the correlation between W1 and W2 is 0.4. Consider the dynamics of the ratio S2/S1, where A,B,C,D,F,G,I,J,K,L are constants to be found:
d(S2(t)/S1(t))=(AS1B(t)+C)S2D(t)dt+FS1G(t)S2I(t)dW1(t)+JS1K(t)S2L(t)dW2(t)
Enter the value of A:
Enter the value of B:
Enter the value of C:
Enter the value of D:
Enter the value of F:
Enter the value of G:
Enter the value of I:
Enter the value of J:
Enter the value of K:
Enter the value of L:
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