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9.A variable x starts at zero and follows the generalized Wiener process

dx = a dt + b dz

where time is measured in years. During the first two years a=3 and b=4. During the following three years a=6 and b=3. What is the expected value of the variable at the end of 5 years

A.16

B.20

C.24

D.30

dx = a dt + b dz

where time is measured in years. During the first two years a=3 and b=4. During the following three years a=6 and b=3. What is the expected value of the variable at the end of 5 years

A.16

B.20

C.24

D.30

Answer: C

During the first two years, the drift per year is 3 and so the total drift is 3×2 or 6. During the next three years, the drift per year is 6 and the total drift is 6×3 = 18. The total drift over the five years is 6+18 =24. Given that the variable starts at zero, its expected value at the end of the five years is therefore 24.

During the first two years, the drift per year is 3 and so the total drift is 3×2 or 6. During the next three years, the drift per year is 6 and the total drift is 6×3 = 18. The total drift over the five years is 6+18 =24. Given that the variable starts at zero, its expected value at the end of the five years is therefore 24.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015