Chapter 9, Problem 15AYK

Suppose you have to select one project partner from a set of four classmates, who have different GPAs. Assume you do not know any student’s GPA in advance but can get to know it after you have picked a student from that group (a) Suppose you pick one of the four students at random and accept that student as your project partner. What is the probability that your partner is the one with the highest GPA? (b) Suppose you decide to reject the first student and to then accept the next student if and only if that student has a higher GPA. Note that you MUST have a partner, so if the first three are rejected by you, then you have to accept the fourth student. What is the probability that your partner will be the one with the highest GPA.

Using your knowledge of knock-out options and their pricing via Monte Carlo simulation, demonstrate the effect on option prices when we vary the frequency at which barrier crossing is checked. This question is intentionally ambiguous to assess your maturity in approaching problems that are likely to arise in the real world. You will choose your own option parameters, perform the simulation and report the results as you see fit in order to demonstrate the effect. Type your code here, followed by a commentary

It is not obvious why intervals in risk analyses are preferred over exact numbers when referring to both probability and consequence.