This document contains 5 stochastic analysis problems dealing with wide-ranging stochastic processes:
1) Showing the covariance of two integrals of a deterministic process with respect to Brownian motion.
2) Solving a stochastic differential equation and computing its expectation and variance.
3) Solving another stochastic differential equation.
4) Finding the solution to an interest rate process and showing it takes negative values.
5) Proving a representation for a positive martingale.
This document contains 5 stochastic analysis problems dealing with wide-ranging stochastic processes:
1) Showing the covariance of two integrals of a deterministic process with respect to Brownian motion.
2) Solving a stochastic differential equation and computing its expectation and variance.
3) Solving another stochastic differential equation.
4) Finding the solution to an interest rate process and showing it takes negative values.
5) Proving a representation for a positive martingale.
This document contains 5 stochastic analysis problems dealing with wide-ranging stochastic processes:
1) Showing the covariance of two integrals of a deterministic process with respect to Brownian motion.
2) Solving a stochastic differential equation and computing its expectation and variance.
3) Solving another stochastic differential equation.
4) Finding the solution to an interest rate process and showing it takes negative values.
5) Proving a representation for a positive martingale.
SAFprob 6 - Wide ranging stochastic problems - deals with
SAFIII Stochastic Analysis in Finance (The University of Edinburgh)
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STOCHASTIC ANALYSIS IN FINANCE PROBLEM SET 6
I. Gyöngy, Room 5612
R (1) Let X := 0t gs dWs , t ∈ [0, T ], where g is a deterministic process such R R that, 0T gs2 ds < ∞. Show that E(Xt Xs ) = 0t∧s gs2 ds for all s, t ∈ [0, T ]. (2) Consider the equation dXt = bXt dt + σdWt , X0 = ξ, where W is an Ft -Wiener martingale, ξ is an F0 -measurable random variable and b, σ are positive constants. (i) Show that this equation has a unique solution Z t bt Xt := ξe + σb eb(t−s) Ws ds + σWt . 0 (ii) Show that Z t bt Xt := ξe + σ eb(t−s) dWs . 0 (iii) Compute the expectation and the variance of Xt . (v) Let ξ be a positive number a. Show that P (Xt < C) > 0 for C ∈ R and 0 < t ≤ T . (3) Solve the equation dXt = (aXt + b)dt + (σXt + β)dWt , X0 = ξ, where a, b, σ, β are given numbers. (4) In the Vasicek model the interest rate process (rt )t≥0 satisfies the follow- ing equation: drt = a(b − rt )dt + σdWt , r0 = 1, where a, b, σ are positive constants. Find the solution rt of this equation. Show that rt takes negative values with positive probability, for each t > 0. (5) Let X := (Xt )t∈[0,T ] be a positive Ft -martingale, where Ft is the history of a Wiener process W . Assume that EXT2 < ∞. Prove that Z t 1Zt 2 Xt = X0 exp( σs dWs − σ ds), t ∈ [0, T ] 0 2 0 s for some stochastic process σ ∈ S.