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Problem Set 5 Saf PDF

This document contains a problem set for a course on Stochastic Analysis in Finance. It includes 6 problems related to stochastic processes, martingales, supermartingales, and stochastic differential equations. The problems involve calculating expectations of stochastic processes, applying Fatou's lemma to show properties of local martingales, proving properties of supermartingales, and solving stochastic differential equations.

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95 views2 pages

Problem Set 5 Saf PDF

This document contains a problem set for a course on Stochastic Analysis in Finance. It includes 6 problems related to stochastic processes, martingales, supermartingales, and stochastic differential equations. The problems involve calculating expectations of stochastic processes, applying Fatou's lemma to show properties of local martingales, proving properties of supermartingales, and solving stochastic differential equations.

Uploaded by

trols sad
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Problem Set 5 (SAF)

Stochastic Analysis in Finance (The University of Edinburgh)

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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.

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