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    24exer6 2

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    piyush raghav
    This document provides 3 exercises from a problem set on stochastic calculus. Exercise 1 involves finding properties of a stochastic process defined with Brownian motion. Exercise 2 asks to calculate probabilities related to Brownian motion reaching certain values. Exercise 3 uses Ito's formula to derive a differential equation and solve for a function related to another stochastic process defined with Brownian motion.

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    24exer6 2

    Uploaded by

    piyush raghav
    12 views1 page
    This document provides 3 exercises from a problem set on stochastic calculus. Exercise 1 involves finding properties of a stochastic process defined with Brownian motion. Exercise 2 asks to calculate probabilities related to Brownian motion reaching certain values. Exercise 3 uses Ito's formula to derive a differential equation and solve for a function related to another stochastic process defined with Brownian motion.

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    24exer6-2

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    This document provides 3 exercises from a problem set on stochastic calculus. Exercise 1 involves finding properties of a stochastic process defined with Brownian motion. Exercise 2 asks to calculate probabilities related to Brownian motion reaching certain values. Exercise 3 uses Ito's formula to derive a differential equation and solve for a function related to another stochastic process defined with Brownian motion.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    12 views1 page

    24exer6 2

    Uploaded by

    piyush raghav
    This document provides 3 exercises from a problem set on stochastic calculus. Exercise 1 involves finding properties of a stochastic process defined with Brownian motion. Exercise 2 asks to calculate probabilities related to Brownian motion reaching certain values. Exercise 3 uses Ito's formula to derive a differential equation and solve for a function related to another stochastic process defined with Brownian motion.

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    © All Rights Reserved
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    of 1

    FINM 34500/STAT 39000

    Problem Set 6 (due February 12)


    Reading: 4.1 and 4.2

    Exercise 1 Let Bt be a standard Brownian motion and let


    Z t
    1
    Zt = α
    dBs , 0 ≤ t < 1.
    0 (1 − s)

    1. Show that if α = 1/4, then Zt , 0 ≤ t < 1 is a square integrable martingale and find a
    C < ∞ such that for all t < 1, Var(Zt ) ≤ C.

    2. Show that if α = 1, then with probability one there will exists t < 1 with Zt = 1.

    Exercise 2 Suppose Bt is a Brownian motion starting at x with 0 < x < 1.

    1. What is the probability that the Brownian motion will obtain a value of 3 before reaching
    0?

    2. Do the same question for Xt defined by


    Z t
    Xt = x + Bs dBs .
    0

    Exercise 3 Suppose that a process Xt satisfies

    dXt = −2 Xt dt + dBt , X0 = 1,

    where Bt is a standard Brownian motion. Let T be the first time that Xt = 6 or Xt = 0.


    Suppose F is a C 2 function with F (0) = 0, F (x) > 0 for x > 0, and such that F (Xt∧T ) is a
    martingale.

    1. Use Itô’s formula to find the second order ordinary differential equation that F satisfies.

    2. Solve the differential equation to find one such function F . (Hint: it is easier to find
    F ′ first and then integrate to get F . You may leave your answer in terms of a definite
    integral.)

    3. Find the probability that XT = 6. You can write the answer in terms of the function
    F.

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