Assume X1 and X2 are strictly positive It processes. Use Its formula to derive the following: (a)
Question:
Assume X1 and X2 are strictly positive Itô processes. Use Itô’s formula to derive the following:
(a) Define Yt = X1tX2t. Show that dY Y = dX1 X1
+
dX2 X2
+
dX1 X1
dX2 X2
.
(b) Define Yt = X1t/X2t. Show that dY Y = dX1 X1
− dX2 X2
−
dX1 X1
dX2 X2
+
dX2 X2
2
.
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