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Using r instead of mu in the SDE of Geometric BM

J

James123

Member
Hi,

I am looking at Oct2010 Q5(iii) - in the formula for the SDE they have used the rfr 'r' instead of mu therefore giving ds(t) = s(t)[rd(t) + sigma(dB(t))]

I don't understand how you can use these interchangeably or how you would even know to do so in this Question? They are completely separate variables; mu is the the drift of the process whilst r is the risk free rate.

Thanks,
James
 
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