Hi,
I was wondering if you could help me to understand these two questions.
9(iii). I always seem to get the values of shares/cash with the opposite signs. If I want to hedge a call option do I not want to have -2600 shares, this will give me a negative delta which will cancel the call option delta? Why is it positive in the solutions?
11(iii) I thought I could follow this simple equation of calculating the probabilities of transition:
Prob = 1 – exp(-Lambda).
where lambda represents the transition intensity.
However, when I use this equation to build up a solution I am constantly wrong. A simple example would be the exam paper solution says that:
P_2(1) = 0.41483 where this describes the probability that I am in stage 2 at time 1.
When I derive this probability i get the following:
1 – ( 1 – exp (-0.25)) – (1 – exp (-0.75))
Where 0.25 and 0.75 are transition intensities which is not equal to the exam papers value. Could you please explain why?
My guess is that I must be wrong in my approach because I am operating in a multiple transition world hence I cant do this simple approach and therefore must use this differential equation approach shown in the notes? Or have I just made some silly equation error.
I was wondering if you could help me to understand these two questions.
9(iii). I always seem to get the values of shares/cash with the opposite signs. If I want to hedge a call option do I not want to have -2600 shares, this will give me a negative delta which will cancel the call option delta? Why is it positive in the solutions?
11(iii) I thought I could follow this simple equation of calculating the probabilities of transition:
Prob = 1 – exp(-Lambda).
where lambda represents the transition intensity.
However, when I use this equation to build up a solution I am constantly wrong. A simple example would be the exam paper solution says that:
P_2(1) = 0.41483 where this describes the probability that I am in stage 2 at time 1.
When I derive this probability i get the following:
1 – ( 1 – exp (-0.25)) – (1 – exp (-0.75))
Where 0.25 and 0.75 are transition intensities which is not equal to the exam papers value. Could you please explain why?
My guess is that I must be wrong in my approach because I am operating in a multiple transition world hence I cant do this simple approach and therefore must use this differential equation approach shown in the notes? Or have I just made some silly equation error.