Question 8 part 4

Discussion in 'CT8' started by Adienl, Sep 15, 2016.

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  1. Adienl

    Adienl Member

    I'm referring to question 7 of April 2009, part (iii). Ignore the heading, as I don't know how to edit it!!
    Please refer to the solution.
    In the solutions given in the examiner report(both of them) why don't we've the probabilities conditioned on \(S_0=1.8\)??
     
    Last edited by a moderator: Sep 15, 2016
    Adienl, Sep 15, 2016
    #1
  2. Whippet1

    Whippet1 Member

    I think this is just an (unhelpful / incorrect) omission in the Examiners' Report solution, as you definitely do need to condition on the current share price in order to work out the probability of the future share price exceeding (or being less than) any particular value.
     
    Whippet1, Sep 16, 2016
    #2
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  3. Steve Hales

    Steve Hales ActEd Tutor Staff Member

    Hi
    It should be conditioned on \(S_0=1.8\), in fact it is, but it's just not written out in the solution! You'll find that it's introduced in the third line of the Examiners' Report when they subtract the \(\ln(1.8)\).
    Well spotted.
     
    Steve Hales, Sep 16, 2016
    #3
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  4. Adienl

    Adienl Member

    I agree with the final answer and the intermediate steps. I was just confused because they used the unconditional distribution of the stock price.
    Thank you for responding.
     
    Adienl, Sep 16, 2016
    #4

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