In an economy, there is a risk-free bond, and its price is determined by dB dt,...

 

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In an economy, there is a risk-free bond, and its price is determined by dB dt, where r is the constant risk-free rate. There are two risky assets whose dynamics follow the two processes: dS/S= µs dt + Os dzs, dY/Y = μy dt + Oy dzy. = rB The correlation between dzs and dzy is p. A. If the risky asset S is used as the numeraire asset, please derive the equivalent Martingale process for S. B. If the risky asset Y is used as the numeraire asset, please derive the equivalent Martingale process for S. In an economy, there is a risk-free bond, and its price is determined by dB dt, where r is the constant risk-free rate. There are two risky assets whose dynamics follow the two processes: dS/S= µs dt + Os dzs, dY/Y = μy dt + Oy dzy. = rB The correlation between dzs and dzy is p. A. If the risky asset S is used as the numeraire asset, please derive the equivalent Martingale process for S. B. If the risky asset Y is used as the numeraire asset, please derive the equivalent Martingale process for S.

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To derive the equivalent Martingale process for the risky asset S under the two scenarios using S an... View the full answer