Option Pricing Models Are Based on Ito Processes $Y _ { t }$

question 3

Multiple Choice

Option pricing models are based on Ito processes. Which of the following statements best describes Ito processes? Ito processes $Y _ { t }$ are

• A) A special case of Wiener processes \(W _ { t }\) .
• B) Are functions of Wiener processes: in SDE form, \(d Y ( t ) = a d t + b d W ( t )\) .
• C) Are functions of Wiener processes: in SDE form, \(d Y ( t ) = a d t + b d W ( t )\) , with the restriction that \(\alpha\) and \(b\) have to be constants.
• D) Are functions of Wiener processes: in SDE form, \(d Y ( t ) = a d t + b d W ( t )\) , with the restriction that \(\alpha\) and \(b\) have to be constants or functions of time \(t\) alone.

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Definitions:

Unrecognized Prior Service Cost

Costs associated with retroactive benefits granted in pension plans, which are not immediately recognized as an expense but are amortized over time.

Years-Of-Future-Service Method

An actuarial technique used to calculate pension benefits, taking into account the expected years of service remaining for an employee.

Defined Benefit Pension Plan

A retirement plan where employee benefits are calculated using a formula that considers several factors, such as length of employment and salary history, with the employer bearing the investment risk.

Projected Benefit Obligation

An actuarial estimation of the present value of all the benefits earned by employees, taking into account expected future salary increases.