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2016 Financial Mathematics Assignment

This document contains instructions for Assignment 1 due on April 22, 2015. It includes 4 questions on probability density functions, Brownian motion, and risk modeling for an insurance company. Students are asked to complete problems related to finding constants, simulating distributions, limits, distributions of sums of random variables, and probabilities involving Brownian motion processes. Assignments should be submitted in the MTH3251 box on the ground floor of 9 Rainforest Walk by 5:00 pm on the due date.

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346 views1 page

2016 Financial Mathematics Assignment

This document contains instructions for Assignment 1 due on April 22, 2015. It includes 4 questions on probability density functions, Brownian motion, and risk modeling for an insurance company. Students are asked to complete problems related to finding constants, simulating distributions, limits, distributions of sums of random variables, and probabilities involving Brownian motion processes. Assignments should be submitted in the MTH3251 box on the ground floor of 9 Rainforest Walk by 5:00 pm on the due date.

Uploaded by

Dfc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Assignment 1, MTH 3251, ETC3510, BEX3510 Due Date: 5.

00 pm on Friday 22 April 2015

Assignments are to be put in the MTH3251 box on the ground floor of 9 Rainforest Walk.

• (20 pts) Consider probability density function


( 3
K(x2 ex + x4 ) if x ∈ (0, 1),
f (x) =
0 if x ∈
/ (0, 1),

for an appropriate constant K.

1. Find K.
2. How to simulate from f (x)?
3. Describe the ‘cost’of this simulation: how many steps, on average, are needed to obtain the
simulation?

• (30 pts) Consider a Brownian motion {Bt , t ≥ 0}.

1. Using the strong law of large numbers, find


Bn
lim .
n→∞ n
√
2. Find the distribution of Bn / n.
3. Consider the event
∞ n
\ o
(1) (Bj+1 − Bj ) ≤ 1000
j=1

Evaluate the probability of the event appearing in (1).


4. What is the probability that maxs∈[0,∞) |Bs | ≤ 500? Hint Use the event appearing in (1).
5. If we substitute any large integer M instead of 500, will the previous question’s answer change?
(Justify your answer).
6. Find maxs∈[0,∞) |Bs |.

• (20 pts) Let {Bt , t ≥ 0} be a Brownian motion. Consider the risk model for an insurance company,

Un = 100 + 10n + Bn .

Give an estimate (lower bound) on the probability that Un is always positive.

• (30 pts) Suppose that Wt and Bt , with t ≥ 0, are two indepedent Brownian motions. Define
Mt = (Wt − Bt )/2.
√
1. Prove that 2Mt , with t ≥ 0, is Brownian motion.
2. Is Yt = Mt + Bt , with t ≥ 0, a martingale? Justify your answer.
3. Is Yt2 − at, with t ≥ 0, a martingale for some choice of a? Justify your answer.
4. For fixed t, are Yt and Mt independent? Justify your answer.

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