Answered step by step
Verified Expert Solution
Question
1 Approved Answer
4. The opening values of Amazon's shares (AMZN) recorded at the beginning of each month from February 2020 to January 2021 are: Feb $2,010.60||
4. The opening values of Amazon's shares (AMZN) recorded at the beginning of each month from February 2020 to January 2021 are: Feb $2,010.60|| Jun $2,448.00 || Oct $3,208.00 Mar $1,906.49 Jul $2,757.99 Nov $3,061.74 Apr $1,932.97 Aug $3,180.51 Dec $3,188.50 May $2,336.80 Sep $3,489.58 Jan $3,270.00 (i) Compute their monthly logarithmic returns. Hence based on such histor- ical data, estimate the monthly drift and volatility of the AMZN stock. (ii) Using the data computed in (i), model the future AMZN share values with the N-step log-normal random walk model S(t) = S(0) elt+aWN(t) (a) Define what are , o, and WN(t) in the above N-step log-normal random walk model. (b) Compute the future values in 2 months of the AMZN stock using first a 2-step model and then a 3-step model. (c) Assume that the risk-free asset's interest rate compounded continu- ously is r = 1% per year. Using the future AMZN stock values ob- tained with the 2-step model, find the premium and the values at each time step of a European put option having strike price X = $3,300, expiry time in 2 months and whose underlying asset is the AMZN stock. (d) Compute the expected value of the AMZN stock values at time t > 0 for the log-normal random walk with N steps and in the limit N . You may use the resulte-2/2dz = 2.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Solution To compute the monthly logarithmic returns we can use the formula Logarithmic Return lnStSt1 where St is the closing price at the end of the ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started