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qid 271 · business

Question: Consider an arbitrage-free securities market model, in which the risk-free interest rate is constant. There are two nondividend-paying stocks whose price processes are: $S_1(t)=S_1(0)e^{0.1t+0.2Z(t)}$ $S_2(t)=S_2(0)e^{0.125t+0.3Z(t)}$ where $Z(t)$ is a standard Brownian motion ant $t\ge0$. What is the continuously compounded risk-free interest rate?

  1. 0.08
  2. 0.025
  3. 0.02
  4. 0.09
  5. 0.01
  6. 0.03
  7. 0.06
  8. 0.05
  9. 0.07
  10. 0.04

Our answer: C. 0.02 Source pending

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How it was answered

Stored formula / worked method, replayed by code

Continuous-time no-arbitrage market completeness risk-free rate problem

card: formula · card sha256 7604e255dae90158…

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addendum formula_qid271.formula_ADDENDUM_source · sha256 19c0e55e0805baf9…

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