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    Ex4 21

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    Harsh Raj
    This document contains 13 exercises related to stochastic calculus for finance. The exercises cover topics such as simple stochastic processes, martingales, Ito's formula, expectations of Brownian motion, stochastic differential equations, Ito integrals, and Riemann sums.

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    Ex4 21

    Uploaded by

    Harsh Raj
    16 views2 pages
    This document contains 13 exercises related to stochastic calculus for finance. The exercises cover topics such as simple stochastic processes, martingales, Ito's formula, expectations of Brownian motion, stochastic differential equations, Ito integrals, and Riemann sums.

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    Ex4_21

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    This document contains 13 exercises related to stochastic calculus for finance. The exercises cover topics such as simple stochastic processes, martingales, Ito's formula, expectations of Brownian motion, stochastic differential equations, Ito integrals, and Riemann sums.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    16 views2 pages

    Ex4 21

    Uploaded by

    Harsh Raj
    This document contains 13 exercises related to stochastic calculus for finance. The exercises cover topics such as simple stochastic processes, martingales, Ito's formula, expectations of Brownian motion, stochastic differential equations, Ito integrals, and Riemann sums.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 2

    MA 372 : Stochastic Calculus for Finance

    July - November 2021


    Department of Mathematics, Indian Institute of Technology Guwahati
    Exercises 4
    October 06, 2021

    1. We shall call f (t), t ∈ [0, T ] a simple process if there is a finite sequence of


    numbers 0 = t0 < t1 < · · · < tn = T P and square integrable random variables
    n−1
    η0 , η1 , · · · , ηn−1 such that f (t, w) = j=0 ηj (w)I[tj ,tj+1 ) (t), where ηj is Ftj -
    measurable. The set of simple processes will be denoted by Mstep 2 ([0, T ] × Ω)

    2 ([0, T ]×Ω) is a vector space, that is, af +bg ∈ M 2 ([0, T ]×


    a) Show that Mstep step
    2 ([0, T ] × Ω) and a, b ∈ R.
    Ω) for any f, g ∈ Mstep

    b) Show that I : Mstep2 ([0, T ] × Ω) → L2 is a linear map, i.e., for any f, g ∈


    2
    Mstep ([0, T ] × Ω) and a, b ∈ R
    I(af + bg) = aI(f ) + bI(g).

    2 ([0, T ] × Ω)
    c) For any f, g ∈ Mstep
    h i hZ T i
    E I(f )I(g) = E f (t)g(t)dt
    0

    2. Check whether the following processes X(t) are martingale with respect to
    Brownian filtration
    a) X(t) = W (t) + 4t R b) X(t) = W 2 (t)
    t
    c) X(t) = t2 W (t) − 2 0 sW (s)ds
    3. Use Ito’s formula to prove that the following stochastic process are martingale
    with respect to Brownian filtration
    t t
    a) X(t) = e 2 cos W (t) b) X(t) = e 2 sin W (t)
    t t
    c) X(t) = eW (t)− 2 d) X(t) = (W (t) + t)e−W (t)− 2
    4. Define βk (t) = E[W k (t)]; k = 0, 1, 2, · · · ; t ≥ 0
    Use Ito’s formula to prove that
    Z t
    1
    βk (t) = k(k − 1) βk−2 (s)ds; k ≥ 2
    2 0

    a) Deduce that E[W 4 (t)] = 3t2 and find E[W 6 (t)].


    k
    b) Show that E[W 2k+1 (t)] = 0 and E[W 2k (t)] = (2k)!t
    2k k!

    5. For c, α constants, define


    X(t) = ect+αW (t) .
    Prove that
    1
    dX(t) = (c + α2 )X(t)dt + αX(t)dW (t)
    2

    1
    P2
    6. Let h(t) = j=0 (j + 1)I[j,j+1) (t). Define
    Z t
    I(t) = h(s)dW (s), 0 ≤ t ≤ 3.
    0

    Find the distribution function of the random variable I(2). Find the variance
    of the random variable I(3).

    7. Let Π = {t0 , t1 , · · · , tn } be a partition of [0, T ] with 0 = t0 < t1 < · · · < tn = T .


    For α ∈ [0, 1], consider the sum
    n−1
    Xh i
    Sα (Π) = (1 − α)W (tj ) + αW (tj+1 ) (W (tj+1 ) − W (tj )).
    j=0

    Evaluate the limit lim Sα (Π) (in L2 ), where kπk = max (tj − tj−1 ).
    ||Π||→0 j=1,2,···,n

    8. If f (t, x) = et/2 (sin x + cos x), then check whether the process f (t, W (t)) is a
    martingale with respect to Brownian filtration.

    9. Let Π = {t0 , t1 , · · · , tn } be a partition of [0, T ] with 0 = t0 < t1 < · · · < tn = T .


    For α ∈ [0, 1], consider the sum
    n−1
    Xh i
    Sα (Π) = (W (tj+1 ) − W (tj ))2 − (tj+1 − tj ) .
    j=0

    Evaluate the limit lim Sα (Π) (in L2 ), where kπk = max (tj − tj−1 ).
    ||Π||→0 j=1,2,···,n

    10. If f (t, x) = x5 − 10tx3 + 15t2 x, then check whether the process f (t, W (t)) is a
    martingale with respect to Brownian filtration.

    11. Suppose that {W (t); t ≥ 0} is a standard Brownian motion with W (0) = 0.


    Determine an expression for
    Z t
    sin(W (s))dW (s)
    0

    that does not involve Ito integrals.


    Rt
    12. Suppose f (t) is a deterministic function. Let X(t) = X(0) + 0 f (s)dW (s).
    Determine an expression for
    Z t
    f (s)X(s)dW (s)
    0

    that does not involve Ito integrals.


    Rt
    13. Suppose f (t) is a deterministic function. Let X(t) = 0 f (t)[sin(W (t) +
    cos(W (t))]dW (t). Find the mean and variance of the random variable X(2).

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