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Problem 4. A former UConn student is working for a large investment bank. She has invented a new derivative security on Amazon shares. The security

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Problem 4. A former UConn student is working for a large investment bank. She has invented a new derivative security on Amazon shares. The security expires in one year and pays at maturity the average of the monthly prices of the shares. In other words, at time T = 1 year the security will pay its holder the amount of money 12 12 where S () is the Amazon share price at the end of ith month. Compute V, the arbitrage-free price of the derivative security assuming that the current share price S(0) r(12) = 12% (interest per month is r(12)/12 = 1%). Assume that the shares of Amazon do not pay dividends and that one can buy a fraction of a share. = $100 and the monthly annual interest rate Problem 4. A former UConn student is working for a large investment bank. She has invented a new derivative security on Amazon shares. The security expires in one year and pays at maturity the average of the monthly prices of the shares. In other words, at time T = 1 year the security will pay its holder the amount of money 12 12 where S () is the Amazon share price at the end of ith month. Compute V, the arbitrage-free price of the derivative security assuming that the current share price S(0) r(12) = 12% (interest per month is r(12)/12 = 1%). Assume that the shares of Amazon do not pay dividends and that one can buy a fraction of a share. = $100 and the monthly annual interest rate

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