handwriting

Problems (The numbers in brackets are credits, totalled to 28 ): 1. Consider pricing the option for winner that has payoff VT={S1(T),S2(T),ifS1(T)S2(T)otherwise Please write answers by hand where S1(t) and S2(t) represent the time- t prices of two assets with correlation . Price the option under stochastic interest rates. (a) (4) Choose an numeraire asset and define the corresponding martingale measure. (b) (4) Derive the price formula. (c) (4) State the replication strategy. (d) (4) Show that the replication strategy is self financing