Hi, Question 3 says consider a lognormal process St with parameters mu and sigma^2 Am i correct in saying St ~ logN(mu , sigma^2) ? The solution explains St - S0 = logN(mu*t , sigma^2*t) Could someone please explain how to get there? or if my initial understanding is incorrect? Thanks for your help.
Hi, In a lognormal process the differences in the log returns are normally distributed: log(St) - log(S0) ~ N(mu*t , sigma^2*t). This means that log(St/S0) ~ N(mu*t , sigma^2*t), which then arrives at the result in the solution: St/S0 ~ logN(mu*t , sigma^2*t). Alvin.
