Question

Asked Jul 22, 2019

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The following numbers were randomly generated from a standard normal distribution:

-0.25 0.3 1.5 -1.2 -1.65 1.5

Suppose a security follows a geometric Brownian motion with volatility parameter, sigma=0.2, and drift parameter mu=-0.01. If the initial closing price is S_{0}=s=50, compute six more *simulated* daily closing prices.

1 Rating

Step 1

The formula for simulated price,

S based on the initial closing price of S_{0} will be given by the equation on the white board. The meanings of the symbol are shown below:

µ = drift parameter = - 0.01

σ = volatility parameter = 0.2,

t = time period = 1 day = 1/365

ε = randomly generated number from a standard normal distribution

Step 2

So, the formula for simulation will take the shape shown on the white boa...

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