2014 Sheet 7
2014 Sheet 7
2014 Sheet 7
Exercise sheet 7
Itô formula and Girsanov.
Homework:
Please hand in the solutions of Exercises from 7.1 to 7.4 in the lecture on January 22nd.
is a martingale.
(iii) Consider the random variable T = inf{t ≥ 0 : Bt ∈ {a, b}} for a < 0 < b. Show
that Z T
E[BT sin(T )] = E cos(s)Bs ds .
0
Let (Bt )t≥0 be standard Brownian motion and define for α, β > 0 and for all t ≥ 0
α2
Mt = exp αBt + β − t .
2
Exercise 7.4
Let (Bt )t≥0 be a Brownian Motion. Solve the Stochastic Differential Equation (SDE)
dXt = σXt dBt + µXt dt.
Exercise 7.5
Exercise 7.6
Let (Bt )t≥0 be a Brownian Motion. Prove that the following SDE has a unique (strong)
solution: p Xt p
dXt = 1 + Xt2 + dt + 1 + Xt2 dBt .
2
Exercise 7.7
Let (Bt )t≥0 be standard Brownian motion.
(i) Show that the process (Xt )t≥0 defined by
1
dXt = sin dt + dBt
Bt
is also Brownian motion.
(ii) Show that the stochastic differential equation
(
dXt = sin X1t dt + dBt
X 0 = x0