Consider the SDE dX t X t dt X t dW t for the FX rate By considering the domestic and foreign money market accounts with SDEs dB t r t B t dt and dB t r t B t dt and using Girsanovs Theorem, show that the drift under the domestic riskneutral measure is rt r t ...

Start with the SDE for the FX rate dXt Xtdt XtdWt where Xt represents the logarithm of the FX rate i ...

Consider the SDE dX t = X t dt + X t dW t for the FX

Question:

Consider the SDE dX_t = μX_tdt + σX_tdW_tfor the FX rate. By considering the domestic and foreign money market accounts with SDEs dB_t = r_tB_tdt and dB^ƒ_t = r^ƒ_tB^ƒ_tdt and using Girsanov’s Theorem, show that the drift under the domestic riskneutral measure is μ − rt − r^ƒ_t.