By June 15, finish part III: financial markets and products

1. Book: Chapter 1, 2, 3, 4, 5, 6, 7, 10, 11, 12, 26

2. Notes III

By July 31, finish part IV: valuation and risk models

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# Timeline

# Ito Process

# Generalized Wiener Process

By June 15, finish part III: financial markets and products

1. Book: Chapter 1, 2, 3, 4, 5, 6, 7, 10, 11, 12, 26

2. Notes III

By July 31, finish part IV: valuation and risk models

— Thank you my dear for bringing this baby home. Cheer UP

It is a generalized Wiener process in which the parameters a and b are functions of the variable x and t:

This is Markov because the value of x only depends on time t. Both the drift rate and volatility rate are changing overtime.

For the change in small time interval ,

If the change in a small period of time is independent, with a standardized normal distribution (0,1), then z follows the basic Wiener process (Brownian motion). ; for any period T, z = normal(0,T)

A generalized Wiener process of variable x: , where a and b are constants

In a , the change

has a normal distribution with an expected drift rate of a and a variance of .

x in any time interval T is normally distributed with mean of change in x = aT, and variance of change in x =