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Probability Theory Lectures 7

The document discusses a generalized version of the Ito formula, which is used in stochastic calculus. It outlines the mathematical expressions for the differential of a function and the dynamics of a stochastic process, particularly in the context of option pricing. The content is technical and focuses on the application of these formulas in financial mathematics.

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will2710will
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4 views1 page

Probability Theory Lectures 7

The document discusses a generalized version of the Ito formula, which is used in stochastic calculus. It outlines the mathematical expressions for the differential of a function and the dynamics of a stochastic process, particularly in the context of option pricing. The content is technical and focuses on the application of these formulas in financial mathematics.

Uploaded by

will2710will
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Generalization of Ito Formula for f(x ,

+)

d f(xt ,
+) =
(f + (x +, t) +
Me +x(xy t) ,
+ to fx(x +, z))de
+
-
(x-
,
t) fy(x-,)dw +

dx + =

M)xt ,
+)dt +
q(Xt ,
+)dw
=

= aXt cust
5) 0 =

Me
-
=
,

22 0)
*

dexe =

(aexy-axe +
de

+ oe-dw +

0
a -

Get dre ex ex
de
= -

, =

S *-edws
App. to option pricing .

z) wat

se(n
- + +

Sy
=

dwe
·
dt +
dst = MS - os

!
T

↑
time
option expiration
.

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