Tag Info

New answers tagged


You Know that $dB_t=r_tB(t)dt$ . Ito's formula give us \begin{align} dZ(t)=\frac{1}{B(t)}d\,\Pi(t)-\frac{\Pi(t)}{B\,^2(t)}dB(t)+0 \end{align} As your teacher mentioned, $d\Pi(t)=r(t)\Pi(t)dt+\sigma(\Pi(t),t)dW(t)$,Thus we have \begin{align} & dZ(t)=\frac{1}{B(t)}[r(t)\Pi(t)dt+\sigma(\Pi(t),t)dW(t)]-\frac{\Pi(t)}{B\,^2(t)}r(t)B(t)dt\\ & ...


Let $S_t$ and $B_t$ be respectively the stock price and the money market account value at time $t$. Then $S_t/B_t$ is called the discounted stock price. Note that \begin{align*} E\left(\frac{S_N}{S_0}\right) &= E\left(\frac{S_N}{B_N} \frac{B_N}{B_0}\right)\frac{B_0}{S_0}\\ &= E\left(\frac{S_N}{B_N}\right) E\left(\frac{B_N}{B_0}\right)\frac{B_0}{S_0} ...

Top 50 recent answers are included