# Questions tagged [itos-lemma]

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### Delta Gamma Hedging Portfolio of Multiple Options Derivation

I am trying to make the correct derivation of the Delta Gamma Hedge of a portfolio composed of a multi-option strategy, like a Straddle with the following parameters Long 1 Call K = 100, Long 1 Put K =...
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### Proof: Deterministic Ito Integral (Thomas Mikosh Chapter 2)

I'm referencing Elementary Stochastic Calculus with Finance in View by Thomas Mikosch between chapters of Shreve's Volume II text. In one section Mikoshch text makes the following claim without proof: ...
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### Integrated Brownian motion

I occasionally see a post here: Integral of brownian motion wrt. time over [t;T]. This post has the conclusion that $\int_t^T W_s ds = \int_t^T (T-s)dB_s$. However, here is my derivation which is ...
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### How to express the process of number of stock (nt) in a portfolio using ito's lemma

We have a regular self-financing portfolio $W_t$: $$dW_t = n_t dS_t + (W_t − n_t S_t) r dt$$ Where $W_t$ is total wealth, $n_t$ is amount of stock, $S_t$ is stock price, $r$ is the risk-free rate. And ...
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### Deriving an Analytical Expression for Standard Deviation of Log Returns

I am looking to find an expression for the standard deviation log returns of a stock price process. I have a stock price which follows the following dynamics: $dY(t) = Y(t)(r(t)dt + η(t)dW(t))$ Here,...
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### Ito's lemma $f(t,W_t^2)$

Let $f$ be a function of $t$ and $W_t^2$. a)Find a function $f$ such that $f(t,W_t^2)$ is a $F_{t^-}$ martingale, with $F$ the Brownian filtration. b)Use Ito's lemma to show that $f(t,W_t^2)$ is a ...
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### Ito multiplication

Let $\{N_t|0<t\leqslant T \}$ and $\{M_t|0<t\leqslant T \}$ be two Poisson processes with intensities $\lambda_n, \lambda_m>0$, respectively. Based on the implicit results of Corollaries 1 ... 90 views

### Ito's lemma results in negative volatility processes

I struggle with the interpretation of a process I derive from Ito's Lemma. Let's say I have function f(S,t) which is twice differentiable wrt S. I thus can apply Ito's Lemma to get $df(S,t)$. So far ...
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### Ito Lemma for Poisson Process

I'm new to stochastic calculus on jump processes and encountered a difficulty. I would appreciate some clarification from the community on the following question. Let $g_t$ be a $\mathcal{F_t}$-...
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### Solving an SDE using Ito's Lemma

Suppose that $Z(t)=e^{-\int_0^t \theta'(s)dW(s)-\frac{1}{2}\int_0^t ||\theta(s)||^2ds}$ with $\theta()=\sigma^{-1}()[b()-r()]$, $\sigma()>0$ and invertable and $W()$ a Wiener process There is also ...
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### MGF of Generalised Itô Integral

The following derivation produces a moment closure problem - I would appreciate any insight. It may seem trivial at first glance, but the key aspect is the integrand dependence on $t$. Consider $W_t$ ...
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I'm reading Shreve's Stochastic Calculus for Finance, Volume II. In it, he uses the stochastic differential notation. For example, he may write $$\mathrm{d}X(t) = \sigma(t)\mathrm{d}W(t)+\alpha(t)\... 1 vote 1 answer 115 views ### Hermite polynomials as martingales [closed] Let \left\{W_{t}: t \geq 0\right\} be a standard B.M. on the filtered probability space \left(\Omega, \mathcal{F},\left\{\mathcal{F}_{t}\right\}_{t \geq 0}, \mathbb{P}\right). Define the Hermite ... 4 votes 1 answer 342 views ### Ito calculus is Gaussian (using method of characteristic function) Let h be a deterministic function and define X_{t}=\int_{0}^{t} h(s) d W_{s} . Show that$$\mathbb{E} \exp \left(i u X_{t}\right)=\exp \left(-\frac{u^{2}}{2} \int_{0}^{t} h^{2}(s) d s\right), ...
Let $\{W^1\}_{t\geq0}$ and $\{W^2\}_{t\geq0}$ be two Brownian motions with correlation coefficient $\rho \in [0, 1]$, i.e., $\mathbb{E}[(W^1(t)-W^1(s))(W^2(t)-W^2(s))]=\rho(t-s)$ for all $t,s \geq 0$. ...
I'm reading Shreve's Stochastic Calculus for Finance II. On page 191, Exercise 4.6, we are given the problem Exercise 4.6. Let $S(t)=S(0)\exp\Big \{\sigma W(t)+(\alpha-\frac{1}{2}\sigma^2)t\Big\}$ be ...