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10-04-2008, 04:30 AM
 MarcNguyen Member Join Date: Oct 2007 Posts: 60
SOA Sample #22

You are given:
i) Ito process of short-rate: dr(t) =[0.09-0.5r(t)]dt +0.3dZ
ii) Risk-neutral: dr(t) = [0.15-0.5r(t)]dt + sigma(r(t))dZ~
iii) g(t) is derivative of r(t)
dg(r,t) = m(r,g,t)dt -0.4g(r,t)dZ
Determine m(r,g)?

SOA solution: (r+0.08)g
But I think this solution isn't correct because formula (24.19) in textbook that
is dr =[a(r)- (risk premium)]dt+sigma(r)dZ
in stead of dr =[a(r) + (risk premium)]dt+sigma(r)dZ
so Shapre ratio of short-rate is -0.2 then solution must be g(r-0.08).

am I right?

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