Assignment 1, MTH 3251, ETC3510, BEX3510 Due Date: 5.

00 pm on Friday 22 April 2015

Assignments are to be put in the MTH3251 box on the ground floor of 9 Rainforest Walk.

• (20 pts) Consider probability density function

( 3
K(x2 ex + x4 ) if x ∈ (0, 1),
f (x) =
0 if x ∈
/ (0, 1),

for an appropriate constant K.

1. Find K.
2. How to simulate from f (x)?
3. Describe the ‘cost’of this simulation: how many steps, on average, are needed to obtain the
simulation?

• (30 pts) Consider a Brownian motion {Bt , t ≥ 0}.

1. Using the strong law of large numbers, find

Bn
lim .
n→∞ n
√
2. Find the distribution of Bn / n.
3. Consider the event
∞ n
\ o
(1) (Bj+1 − Bj ) ≤ 1000
j=1

Evaluate the probability of the event appearing in (1).

4. What is the probability that maxs∈[0,∞) |Bs | ≤ 500? Hint Use the event appearing in (1).
5. If we substitute any large integer M instead of 500, will the previous question’s answer change?
(Justify your answer).
6. Find maxs∈[0,∞) |Bs |.

• (20 pts) Let {Bt , t ≥ 0} be a Brownian motion. Consider the risk model for an insurance company,

Un = 100 + 10n + Bn .

Give an estimate (lower bound) on the probability that Un is always positive.

• (30 pts) Suppose that Wt and Bt , with t ≥ 0, are two indepedent Brownian motions. Define
Mt = (Wt − Bt )/2.
√
1. Prove that 2Mt , with t ≥ 0, is Brownian motion.
2. Is Yt = Mt + Bt , with t ≥ 0, a martingale? Justify your answer.
3. Is Yt2 − at, with t ≥ 0, a martingale for some choice of a? Justify your answer.
4. For fixed t, are Yt and Mt independent? Justify your answer.