http://www.actuariesindia.org/downloads/exampapers/Nov 2010/QP/ST6_IAI_QP_1110.pdf
In Q9, when using the (inverse of variance-covariance matrix)*(drift - r matrix) approach explained in Baxter and Rennie for quantos, the value of the drift coefficient does not converge to just r, but rather forms a complicated function of beta, sigma and p. Both mu and alpha will converge to r, if and only if sigma = p.
Can someone please confirm this? I see they've conveniently removed the answer for ST6 alone in this diet
http://www.actuariesindia.org/subMenu.aspx?id=121&val=Paper_for_Nov_2010
In Q9, when using the (inverse of variance-covariance matrix)*(drift - r matrix) approach explained in Baxter and Rennie for quantos, the value of the drift coefficient does not converge to just r, but rather forms a complicated function of beta, sigma and p. Both mu and alpha will converge to r, if and only if sigma = p.
Can someone please confirm this? I see they've conveniently removed the answer for ST6 alone in this diet
http://www.actuariesindia.org/subMenu.aspx?id=121&val=Paper_for_Nov_2010