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Chapter 10

Discussion in 'CM2' started by Laura, Jun 30, 2022.

  1. Laura

    Laura Very Active Member

    Hi all,

    In page 20 of the notes, they mention that you can confirm this observation by applying the function f(s,t) =l(s) to the ito diffusion.

    How do you know what function and ito diffusion to use to confirm the observation?

    Thanks in advance for your help!
     
    Laura, Jun 30, 2022
    #1
  2. Steve Hales

    Steve Hales ActEd Tutor Staff Member

    Hi
    The Core Reading is essentially saying that given the correct final answer, we can demonstrate that it's the right answer by working backwards with this carefully chosen Ito process. It's not immediately obvious where that carefully chosen Ito process comes from.
    I think that a more instructive approach is to consider the practice question on page 20 instead, which tackles the problem from the opposite direction: start with ln(S(t)), apply Ito's lemma to find d(ln(S(t))), substitute in for dS(t) and then integrate.
    Hope that helps.
     
    Steve Hales, Jul 4, 2022
    #2

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