Sunday, June 25, 2017

stochastic calculus - How were these SDE derived?



Can anyone give me a detailed explanation of how below equations (3) and (4) are derived from (1) and (2)? dFt,TFt,T=σeλ(Tt)dBt,ln(Ft,T)=ln(F0,T)1/2t0σ2e2λ(Ts)ds+t0σeλ(Ts)dBs.

Given ln(St)=ln(Ft,t), we have: dStSt=(μtλln(St))dt+σdBt,
where μt=ln(F0,t)t+λln(F0,t)+14σ2(1e2λt).
Or anything related to them will be helpful.



Answer



From (2), lnSt=lnFt,t=lnF0,t12t0σ2e2λ(ts)ds+t0σeλ(ts)dBs=lnF0,tσ24λ(1e2λt)+eλtt0σeλsdBs.

Then, λeλtt0σeλsdBs=λlnStλlnF0,t+σ24(1e2λt).
Therefore, dlnSt=(lnF0,ttσ22e2λtλeλtt0σeλsdBs)dt+σdBt=[lnF0,ttσ22e2λt+λlnF0,tσ24(1e2λt)λlnSt]dt+σdBt=(lnF0,tt+λlnF0,tσ24σ24e2λtλlnSt)dt+σdBt.
Note that dlnS,lnSt=σ2dt.
By Ito's lemma, dSt=delnSt=elnStdlnSt+12elnStdlnS,lnSt=StdlnSt+12σ2Stdt=St[(lnF0,tt+λlnF0,tσ24σ24e2λtλlnSt)dt+σdBt+σ22dt]=St[(μtλlnSt)dt+σdBt],
where μt=lnF0,tt+λlnF0,t+σ24(1e2λt).


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