1. If a stock price follows geometric Brownian motion, what process does A(t) follow where A(t) is the arithmetic average stock price between time zero and time t?
2. Explain why delta hedging is easier for Asian options than for regular options.
3. Calculate the price of a 1-year European option to give up 100 ounces of silver in exchange for 1 ounce of gold. The current prices of gold and silver are $380 and $4, respectively; the risk-free interest rate is 10% per annum; the volatility of each commodity price is 20%; and the correlation between the two prices is 0.7. Ignore storage costs.