Consider Zt = ertXt where Xt is an exponential Wiener process: Xt = eWt (a) Calculate the
Question:
Zt = e−rtXt
where Xt is an exponential Wiener process:
Xt = eWt
(a) Calculate the expected value of the increment dZ(t).
(b) Is Zt a martingale?
(c) Calculate E[Zt]. How would you change the definition of Xt to make Zt a martingale?
(d) How would E[Zt] then change?
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a We can calculate the expected value of an increment of dZ t by applying Itos Lemma First we look a...View the full answer
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Related Book For
An Introduction to the Mathematics of Financial Derivatives
ISBN: 978-0123846822
3rd edition
Authors: Ali Hirsa, Salih N. Neftci
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