lOMoARcPSD|3446508

Problem Set 5 (SAF)

Stochastic Analysis in Finance (The University of Edinburgh)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by jaslskd Afas (wvf30453@cndps.com)
 lOMoARcPSD|3446508

FIM, FMO, CMF

STOCHASTIC ANALYSIS IN FINANCE
PROBLEM SET 5

I. Gyöngy, Room 5612

(1) Let X, Y , Z be stochastic processes defined by
Xt := exp(σWt ), Yt := exp(σWt − 21 σ 2 t) Zt := exp(µt + σWt )
for t ≥ 0, where W is a Wiener process and µ and σ are constants. Let
Ft denote the history of W until time t.
(i) Calculate EXT , EYT and EZT for T > 0.
(ii) Calculate E(XT |Ft ), E(YT |Ft ) and E(ZT |Ft ) for 0 ≤ t ≤ T .
(iii) Prove that dP̃ := YT dP defines a probability measure P̃ .
(iv) Calculate EP̃ XT , EP̃ YT and EP̃ ZT .
(v) Calculate EP̃ (XT |Ft ), EP̃ (YT |Ft ) and EP̃ (ZT |Ft ).
(2) Using Fatou’s lemma for the conditional expectation of nonegative ran-
dom variables (ξn )∞ ∞
n=1 , (ξn )n=1 ,
E(lim inf ξn |G) ≤ lim
n→∞
inf E(ξn |G),
n→∞
show that every non-negative local martingale is a supermartingale.
(3) Let S = (St )t∈[0,T ] be a supermartingale. Show that ES0 ≥ EST .
(4) Let S = (St )t∈[0,T ] be a supermartingale such that ES0 ≤ EST . Prove
that S is a martingale.
(5) Let W be an Ft -Wiener martingale and let σ ∈ H(0, T ]). Let ξ be an
F0 random variable. Show that the SDE dγt = σt γt dWt , γ0 = ξ has the
unique solution
Z t
1 Rt 2
γt = ξ exp( σs dWs −
2 0 |σs | ds), 0≤t≤ T.
0
R R
(6) (i) Show that γ =(exp( 0t σs dWs − 21 0t |σs |2 ds)t∈[0,T ] is an
Ft -supermartingale
for every σ ∈ S, where W is an Ft -Wiener martingale.
(ii) Show that γ is an Ft -martingale if and only if EγT = 1.

Downloaded by jaslskd Afas (wvf30453@cndps.com)