Calculus Notes

1 Dierentiation
d k=0 dx Power d kxn = knxn1 dx Sum/dierence d d d [f (x) g (x)] = f (x) g (x) dx dx dx Product d d d [f (x) g (x)] = f (x) g (x) + g (x) f (x) dx dx dx Quotient 1 d d d f (x) = 2 g (x) f (x) f (x) g (x) dx g (x) g (x) dx dx

Constant

Chain rule z = f (y) , and y = f (x) dz dy dz = dx dy dx Inverse dy =1 dx Increments My My M x, Mx dx dy dy dx dx

dy

Total dierential, for z = f (x, y) dz = Log d 1 ln x = dx x 1 f f dx + dy x y

Exponential d x e = ex dx d f (x) d e = ef (x) f (x) dx dx d 1 ln x = dx x d 1 d ln f (x) = f (x) dx f (x) dx d x a = ax ln a dx Trigonometric function d sin x = cos x dx d cos x = sin x dx d 1 arcsin x = dx 1 x2 d 1 arccos x = dx 1 x2 d 1 arctan x = dx 1 + x2 tan x = if t = tan = sin = cos = sin x cos x tan , then 2 2t 1 t2 2t 1 + t2 1 t2 1 + t2

Integration
Z

Power rule 1 xn+1 + c n+1 Z Z 1dx = x0 dx = x + c xn dx = 2

Note that

Exponential Z

1dx is often written as

dx.

ex dx = ex + c

f 0 (x) ef (x) dx = ef (x) + c f 0 (x) = ax dx = d f (x) dx 1 x a +c ln a

Z Logarithmic Z

1 dx = ln |x| + c x Z 1 1 dx = ln |ax + b| + c ax + b a Z 0 f (x) dx = ln f (x) + c, for f (x) > 0 f (x) Sum Z [f (x) + g (x)] dx = Z Z Z f (x) dx + Z Z g (x) dx

Multiple

K f (x) dx = K

f (x) dx

Sunstitution

du f (x) dx = dx Z

Z Z

f (u) du

By parts

vdu = uv

udv

Denite integral F (x)]b = F (b) F (a) a Z a Z b f (x) dx = f (x) dx a b Z c Z c Z b f (x) dx = f (x) dx + f (x) dx f (x) dx =
a a b a

Trigonometric function Z Z cos xdx = sin x + c sin xdx = cos x + c 1 sin (ax + b) + c a

cos (ax + b) dx =

Integral of normally distributed variable:

If y N (, ) and let = T t, then from Rubinstein (1976) b Z a f (y) dy = N b a Z 1 2 a y + e+ 2 b e f (y) dy = N b a and (the following is not strictly part of calculus) E (ey ) = e+ 2 . For more on the moment generating function of a normally distributed variable, see Mood A.M., F.A. Graybill and D.C. Boes (1974) Introduction to the theory of statistics, McGraw-Hill.
1 2

Ito lemma

Lemma 1 (Itos lemma) If a stochastic variable Xt satises the SDE dXt = (Xt , t) dt + (Xt , t) dWt then given any function f (Xt , t) of the stochastic variable Xt which is twice differentiable in its rst argument and once in its second, 1 2 2 + (Xt , t) + (Xt , t) df (Xt , t) = 2 f (Xt , t) dt t Xt 2 Xt f (Xt , t) dWt + (Xt , t) Xt

Example 2 G G 1 2 G 2 G dG (x, t) = a+ + bdz b dt + 2 x t 2 x x given dx = a dt + b dz where z is a standard Brownian motion. Apply Itos lemma on the log process, we get G = ln x 1 G G = , = 0, x x t

2G 1 = 2 2 x x

dx = xdt + xdz 1 1 1 x + 0 2 2 x2 dt + xdz d ln x = x 2x x 1 2 = dt + dz 2

Quadratic variation: For relative changes dXt Xt dYt Yt = x (Xt , Yt , t) dt + x (Xt , Yt , t) dWt = y (Xt , Yt , t) dt + y (Xt , Yt , t) dWt

the quadratic co-variation of the increments of X and Y can be computed by calculating the expected value of the product d [X, Y ]t = Cov [ dXt , dYt | Ft ] = x y Xt Yt dt or more rigorously, lim
n1 X j=0

kT k0

(X (tj+1 ) X (tj )) (Y (tj+1 ) Y (tj )) = 5

x (s) X (s) y (s) Y (s) ds a.s.

0

Lemma 3 (Itos product rule) d (Xt Yt ) Xt Yt dXt dYt d [X, Y ]t + + Xt Yt Xt Yt = x + y + x y dt + ( x + y ) dWt =

Lemma 4 (Itos quotient rule) d ( Xt / Yt ) Xt / Yt dXt dYt d [Y, Y ]t d [X, Y ]t + X Yt Xt Yt Yt2 t 2 = x y + y x y dt + ( x y ) dWt =

Lemma 5 (Itos Isometry) The expectation of the square of a stochastic integral is E "Z
t

hs dWs
0

2 #

=E

t 0

h2 ds s

where ht is any Ft -adapted process. For example: "Z 2 # Z t Z t Z t 2 2 Ws dWs Ws ds = E Ws ds = E =E

0 0 0

1 sds = t2 2 0