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Stochastic Calculus II Exercise Sheet 10: Assignment

The document provides exercises on stochastic calculus. Exercise 1 asks to show the representation of a positive martingale as an exponential of stochastic integrals. Exercise 2 asks to use the martingale method to solve an optimal portfolio problem for a power utility function under Black-Scholes dynamics.

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28 views1 page

Stochastic Calculus II Exercise Sheet 10: Assignment

The document provides exercises on stochastic calculus. Exercise 1 asks to show the representation of a positive martingale as an exponential of stochastic integrals. Exercise 2 asks to use the martingale method to solve an optimal portfolio problem for a power utility function under Black-Scholes dynamics.

Uploaded by

DIA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Stochastic Calculus II

Exercise Sheet 10
Prof. D. Filipović, E. Hapnes

Please hand in your solutions to exercises 1 and 2 on Wednesday 16.5.2018 at the


beginning of the lecture.

Assignment
Exercise 1: Fix a stochastic basis (Ω, F, (FtW )0≤t≤T , P) with the filtration (FtW )0≤t≤T gener-
ated by a Brownian motion W . Let X = (Xt )0≤t≤T be a positive (Xt > 0 for all t ∈ [0, T ])
martingale on (Ω, F, (FtW )0≤t≤T , P). Show that there exists a unique λ ∈ L[0, T ] such that
Z t
1 t
Z 
2
Xt = X0 exp λs dWs − |λs | ds , t ∈ [0, T ].
0 2 0
4 points

Exercise 2: Following the framework presented in the ”Self-financing Portfolios” and ”Optimal
Portfolios via Martingale Method” sections, we assume that the dynamics of the risk–free and
the risky asset are given by the Black-Scholes model

dBt = Bt r dt, B0 = 1, dSt = St (α dt + σ dWt ), S0 = s0 > 0,

where r, α, σ > 0 are constants.


Use the martingale method to solve the portfolio problem

sup E[Φ(XTπ )],


π∈L

given an initial wealth x0 > 0, and


xγ
Φ(x) := for a γ ∈ (0, 1).
γ

6 points

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