Hello evrebody,
I don't know if I'm posting in the right section then sorry if I'm wrong. I write here on the forum because I don't understand the answer to an exercise on M. Joshi's book on fin math (concepts and practice of mathematical finance) and hope somebody can help. First of all this is the first time I study this subject and probably I need to examine more in depth the theoretical basis. Anyway the exercise is the 2.15:
S (non-dividend stock), exp(rt) (riskless bond).
A contract pays S(t2)-S(t1) at time t2. replicate this contract by trading in the stock and riskless bond.
Now it's clear to me how lock S(t1) and S(t2), that is buying S at t0 (will be S(t2) at t2) and buy S(t1)*exp[-r(t2-t1)] bonds at t1 so these will be S(t1) at t2......the answer to the exercise is to buy today (at t0) S(t0) stocks and S(t0)exp[-r(t2-t1)] stocks. Then sell the second amount of shares and buy the bonds at t1....I don't understand why this procedure will give me S(t2)-S(t1) at t2.....mean why the difference between them?
So excuse me for my terrible eng and thanks everybody for the attention, regards
iacopo
I don't know if I'm posting in the right section then sorry if I'm wrong. I write here on the forum because I don't understand the answer to an exercise on M. Joshi's book on fin math (concepts and practice of mathematical finance) and hope somebody can help. First of all this is the first time I study this subject and probably I need to examine more in depth the theoretical basis. Anyway the exercise is the 2.15:
S (non-dividend stock), exp(rt) (riskless bond).
A contract pays S(t2)-S(t1) at time t2. replicate this contract by trading in the stock and riskless bond.
Now it's clear to me how lock S(t1) and S(t2), that is buying S at t0 (will be S(t2) at t2) and buy S(t1)*exp[-r(t2-t1)] bonds at t1 so these will be S(t1) at t2......the answer to the exercise is to buy today (at t0) S(t0) stocks and S(t0)exp[-r(t2-t1)] stocks. Then sell the second amount of shares and buy the bonds at t1....I don't understand why this procedure will give me S(t2)-S(t1) at t2.....mean why the difference between them?
So excuse me for my terrible eng and thanks everybody for the attention, regards
iacopo
