Markets: A Rigorous Course

M13A · Problem 8 ★★ Check

Passage times and a band

For the spread of Problem 13A.7, consider the cycle strategy with a=θ^−0.02a = \hat\theta - 0.02, m=θ^+0.02m = \hat\theta + 0.02 and round-trip cost c=0.003c = 0.003. (a) Compute the expected cycle length in trading days from (13A.28). (b) Compute the expected time from aa to mm and from mm back to the mean θ^\hat\theta, using (13A.27). (c) Compute the expected profit per year in spread units.

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