Excercise 1 Use It

os lemma to solve the stochastic differential equation

Z t
Z t
19dBs .
(7 8Xs )ds +
Xt = 1 +
0

Solution: Let Xt = Zt + 87 . Then 7 8Xt = 8Zt and we can rewrite equation as

Z t
Z t
7
=18
Zs ds + 19
dBs ,
8
0
0
Z t
Z t
1
Zt = 8
Zs ds + 19
dBs .
8
0
0

Zt +

Let Yt = e8t Zt . Applying It

o lemma with
f (x, t) = e8t x,

f
(t, x) = e8t ,
x

f
= 8f,
t
A(1) = 8Z,

2f
= 0,
x2

A(2) = 19

we obtain
Yt

1
=
8

(e8s (8Zs 8Zs ) + 0) ds + 19

e8s dBs = 19

e8s dBs .

Therefore,
Z t
1
+ 19
de8s Bs ,
8
0


Z t
1
+ 19
e8s dBs ,
Zt = e8t Yt = e8t
8
0
Z t
8t
e
+7
7
+ 19e8t
e8s dBs .
Xt = Zt + =
8
8
0
Yt =


Excercise 2 Use It
os lemma to solve the stochastic differential equation
Z t
Z t
Xt = 2 +
(10s2 7sXs )ds +
9s3 dBs .
0

Solution: For
Z

y(t) = exp


2
7s ds = e7t /2

we obtain
Xt = e

7t2 /2

Z
X0 +

2 7s2 /2

10s e

Z
ds +

9s e
0


Excercise 3 Suppose
Z
Xt =

Z
3Xs ds +

Use It
os lemma to find E(Xt2 ).
1

7 dBs .
0

3 7s2 /2


dBs .

Solution: Let Yt = e3t Xt . Applying Ito lemma with

f (x, t) = e3t x,

f
= 3f,
t

f
(t, x) = e3t ,
x

A(1) = 3X,

A(2) = 7

2f
= 0,
x2

we obtain
t

Z
Yt =

(e

3s

Z
(3Xs + 3Xs ) + 0) ds + 7

3s

e3s dBs .

dBs = 7

Therefore,
Z

e3s dBs ,

Yt = 7
0

Xt = e3t Yt = 7e3t

e3s dBs ,

49 6t
(e 1),
6
49 6t
E(Xt2 ) = (E(Xt ))2 + D(Xt ) =
(e 1).
6
E(Xt ) = 0,

D(Xt ) =


Excercise 4 Use It
os lemma to solve the stochastic differential equation
Z t
Z t
Xt = 1 +
(5 9Xs ) ds +
11 dBs .
0

Solution: Let Xt = Zt +

5
9.

Then 5 9Xt = 9Zt and we can rewrite equation as

Z t
Z t
5
Zs ds + 11
dBs ,
Zt + = 1 9
9
0
0
Z t
Z t
4
Zt = 9
Zs ds + 11
dBs .
9
0
0

Let Yt = e9t Zt . Applying It

o lemma with
f (x, t) = e9t x,

f
(t, x) = e9t ,
x

f
= 9f,
t
A(1) = 9Z,

2f
= 0,
x2

A(2) = 11

we obtain
Yt

4
=
9

(e9s (9Zs 9Zs ) + 0) ds + 11

e9s dBs = 11

Therefore,
Z t
4
+ 11
de9s Bs ,
9
0


Z t
4
9t
9t
9s
Zt = e Yt = e
+ 11
e dBs ,
9
0
Z t
5
4 e9t + 5
Xt = Zt + =
+ 11e9t
e9s dBs .
9
9
0
Yt =


2

Z
0

e9s dBs .