[944] HW6 - Q3 cand Q2

[Lucas Duarte Bahia]

Hi,

Q3 -c) Is it enough to say that I derived the PDE assuming dX(t) = dc, and
by uniqueness of semi-martigale we get that  X=c?

Q2)
I saw an email earlier and the question itself saying that there is an
arbitrage and that the option was priced incorrectly.

I don't see how you have an arbitrage if at the time you are creating the
hedge you don't know the value of the future volatility, and you have a
non-zero probability of loosing money. I also don't see how the price of
the call is incorrect, for me it is correct but the future was different
than what was expected so the position generated a profit or loss.

Also I noticed that we have the final of the portfolio as an integral
involving among other things the the stock price and gamma. Does that mean
that our wealth value (long call short replicating portfolio) will not be a
markov process?

Best Regards,
*Lucas Duarte Bahia*
MS. Computational Finance Student
Carnegie Mellon University
Telephone: (412) 378-1892
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