You are given the representation: Where the equality holds given the sequence of information sets {I t

Question:

You are given the representation:

Where the equality holds given the sequence of information sets {I_t. The underlying process X_t is known to follow the SDE:

dX_t = ?dt + ?dW_t

Determine the g(-) in the above representation for the case where M(-) is given by:

(a) M_T(X_T) = W_T

(b) M_T(X_T) = W²_T

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An Introduction to the Mathematics of financial Derivatives

ISBN: 978-0123846822

2nd Edition

Authors: Salih N. Neftci

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Question Posted: Aug 17, 2011 10:41 AM

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You are given the representation: Where the equality holds given the sequence of information sets {I t

Question:

M,(X;) = M,(X.) + g(t, X,)dW,

Step by Step Answer:

Given the representation With dX t dt dW t The right hand side is always a martingale as gt ...View the full answer

An Introduction to the Mathematics of financial Derivatives

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