Markets: A Rigorous Course

M03 · Problem 10 ★★ Check

Gambler's ruin with pushes

Each bet wins one unit with probability pp, loses one unit with probability qq, and is a push (no change) with probability s=1−p−qs = 1 - p - q. (a) Show that the ruin probability is (3.16) with ρ=q/p\rho = q/p, and that the expected duration is (3.17), computed with p′=p/(p+q)p' = p/(p+q), divided by p+qp + q. (b) Evaluate for p=0.45p = 0.45, q=0.40q = 0.40, a=8a = 8, N=20N = 20.

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