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Investment / Financial Markets Old Exam MFE Forum

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Old 07-07-2014, 09:14 PM
SuriKate SuriKate is offline
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Default ASM 20.2 question

Interest rates follow Ito Process
dr(t) = 0.3(0.05-r(t))dt + 0.01Root(r(t))dZ(t)

sharpe ratio is 20Root(r(t))
If sharpe ratio is changed to 15Root(r(t)), an equivalent interest rate process is given by

dr*(t)= a(b-r*(t))dt + sigmaxRoot(r*(t))dZ(t)

Determine a, b and sigma

I am not quite understanding the solution. Could someone help to solve this please?

Thank you
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Old 07-07-2014, 09:27 PM
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What A Noob What A Noob is offline
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do the next two questions and see the solutions and you will understand
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