Exercise 10

Exercise Set 10 covers CRR time discretization, recombining trees, risk-neutral probabilities, and log-return decompositions. We worked with standardized increments and the central limit theorem, and compared the real-world and risk-neutral continuous-time stock-price formulas.

Exercise set:

• Exercise Set 10

Solution set:

• Solution set for Exercise 10

Material used:

• Petters–Dong, Sec. 5.2.1, The Real-World CRR Tree, pp. 219–230; Sec. 5.2.2, The Risk-Neutral CRR Tree, pp. 230–236.
• Petters–Dong, Sec. 5.3.1, The Lindeberg Central Limit Theorem, pp. 237–242; Sec. 5.3.2, The Continuous-Time Security Price Formula, pp. 241–245.

Next week’s exercises:

• Exercise Set 11 for Thursday 12 November