--%>

Explain lognormal stochastic differential equation

Explain lognormal stochastic differential equation for evolution of an asset.

E

Expert

Verified

One of the beginning points for typical derivatives theory is the lognormal stochastic differential equation for evolution of a certain asset. Itoˆ’s lemma defines the stochastic differential equation for value of an option on such asset. In mathematical terms, when we have a Wiener process X along with increments dX which are normally distributed along with mean zero and variance dt, in that case the increment of a function F(X) is specified by

dF = (dF/dX) dX + ½ (d2F/dX2) dt

It is a very loose dentition of Itˆ o’s lemma but it will suffice.

   Related Questions in Mathematics

  • Q : Properties of a group How can we say

    How can we say that the pair (G, o) is a group. Explain the properties which proof it.

  • Q : Simulation with Arena An office of

    An office of state license bureau has two types of arrivals. Individuals interested in purchasing new plates are characterized to have inter-arrival times distributed as EXPO(6.8) and service times as TRIA(808, 13.7, 15.2); all times are in minutes. Individuals who want to renew or apply for a new d

  • Q : First-order formulas over the

    Consider the unary relational symbols P and L, and the binary relational symbol On, where P(a) and I(a) encode that a is apoint and a (sraight) line in the 2-dimensional space, respectively, while On(a,b) encodes  that a is a point, b is a line, and o lies on b.

  • Q : Elementary Logic Set & Model of a

    Prove that Elementary Logic Set is a Model of a Boolean Algebra The three Boolean operations of Logic are the three logical operations of  OR ( V ), AN

  • Q : Problem on augmented matrix Consider

    Consider the following system of linear equations.  (a) Write out t

  • Q : How to get calculus homework done from

    How to get calculus homework done from tutor

  • Q : Global And Regional Economic Development

    The Pharmatec Group, a supplier of pharmaceutical equipment, systems and services, has its head office in London and primary production facilities in the US. The company also has a successful subsidiary in South Africa, which was established in 1990. Pharmatec South A

  • Q : Who had find Monte Carlo and finite

    Who had find Monte Carlo and finite differences of the binomial model?

  • Q : Who independently developed

    Who independently developed a model for simply pricing risky assets?

  • Q : Elasticity of Demand For the demand

    For the demand function D(p)=410-0.2p(^2), find the maximum revenue.