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 March 4th, 2018, 09:18 AM #1 Newbie   Joined: Sep 2017 From: xxxx Posts: 8 Thanks: 0 ito lemma Assuming a stock with alpha 0.14, delta 0.01 and volatility of 0.48, how do I derive the price process of a derivative with value V = S^(1/1)e^(0.4)*(1-t) [Equation 1], by using Ito lemma (equation 2)? Ito lemma (equation 2): Where Vs = first derivative of [equation 1] Vt is the first derivative with respect to time of [equation 1] Vss is the second derivative of [equation 1] I thought that the first derivative is: e^(2/5)s and the second one is zero. But I did not take the time component into account since I don't know how do that. At last, one has to substitute the S in equation 2 (ito lemma) with the inverse of V = S^(1/1)e^(0.4)*(1-t) (equation 1). I also don't know what the inverse is and how to substitute. Could someone please help me? I would like to know how to take the derivatives of the first and second order and with respect to time and how to substitute the inverse of equation 1 into equation 2 to replace S? I would be very thankful!! March 5th, 2018, 01:32 AM #2 Math Team   Joined: Jan 2015 From: Alabama Posts: 3,264 Thanks: 902 In "equation 1" surely you do not mean $\displaystyle S^{(1/1)}$. What was that supposed to be? March 5th, 2018, 02:39 AM   #3
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Quote:
 Originally Posted by Country Boy In "equation 1" surely you do not mean $\displaystyle S^{(1/1)}$. What was that supposed to be?
S^1/1 --> will be just S in this case.
Regarding my original question, valuing a derivative means a contract based on the price of a stock e.g. call option. The other 'derivatives' are derivatives in math (1st and 2nd order).

Last edited by skipjack; March 5th, 2018 at 07:32 AM. Tags ito, lemma Thread Tools Show Printable Version Email this Page Display Modes Linear Mode Switch to Hybrid Mode Switch to Threaded Mode Similar Threads Thread Thread Starter Forum Replies Last Post Gear300 Topology 4 April 28th, 2017 05:06 AM wopereis Linear Algebra 1 July 1st, 2013 03:27 AM johnr Number Theory 2 May 5th, 2013 10:34 AM Crouch Advanced Statistics 8 January 13th, 2010 01:59 PM bgBear Algebra 2 August 13th, 2009 09:40 AM

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