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In an economy, there is a risk-free bond, and its price is determined by dB = rB dt, where r is the constant risk-free rate.
In an economy, there is a risk-free bond, and its price is determined by dB = rB dt, where r is the constant risk-free rate. There are two risky assets whose dynamics follow the two processes: dS /S = s dt + s dzs , dY /Y = y dt + y dzy . The correlation between dzs and dzy is .
A. If the risky asset S is used as the numeraire asset, please derive the equivalent Martingale process for S.
B. If the risky asset Y is used as the numeraire asset, please derive the equivalent Martingale process for S.
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