August 29th, 2011, 5:27 pm
QuoteOriginally posted by: listQuoteOriginally posted by: manolomQuoteOriginally posted by: list I think that for example equation d S(t) = (rd (t) - rf(t)) S(t) dt + sigma (rd (t) - rf(t)) S(t) dW(t)looks more analytically realistic thand S(t) = (rd (t) - rf(t)) S(t) dt + sigma S(t) dW(t) ( 1 )This means that the exchange rate between 2 currencies with similar interest rates would be constant over time! One thing is the drift, a different one is the volatility.S ( t ) would be changed over the time as far as r_d and r_f are functions in t and also sigma will also change in time.look, let's just define sigma_list = sigma*(r_d-r_f) ok? then we're back to dX = drift*Xdt + sigma*XdW, get my drift?