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All main topics / Finance & Investment / Derivatives / Derivatives
11.If a variable x follows the process dx = b dz where dz is a Wiener process, which of the following is the process followed by y = exp(x).
A.dy = by dz
B.dy = 0.5b2y dt+by dz
C.dy = (y+0.5b2y) dt+by dz
D.dy = 0.5b2y dt+b dz
Answer: B

Ito’s lemma shows that the process followed by y is dy = 0.5b2exp(x) dt +bexp(x) dz.  Substituting y = exp(x) we get the answer in B.

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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015




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