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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

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.

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.

Flashcard info:

Author: CoboCards-User

Main topic: Finance & Investment

Topic: Derivatives

Published: 27.10.2015