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    Partial Differential Equations : Wiener Process and Ito's Lemma

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    Please help with the following problems. See the following posting for the complete equations

    Consider a random variable r satisfying the stochastic differential equation:

    Where are positive constants and dX is a Wiener process. Let

    (see attached file)

    which transforms the domain for r into (-1,1) for Xi Suppose the stochastic equation for the new random variable Xi is in the form:

    dXi= a(Xi)dt + b(Xi)dX.

    Find the concrete expressions for a(Xi) and b(Xi) and show that a(Xi) and b(Xi) fulfill the conditions:

    {a(-1) = 0, and {a(1) = 0,
    {b(-1) = 0, and {b(1) = 0.

    I am confused because I don't know if you can use Ito's lemma to find the concrete expressions for a(Xi) and b(Xi). Also when taking the partial derivative of ξ with respect to r, I do not know how to treat the absolute value sign. Thanks.

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    Solution Summary

    Wiener Processes and Ito's Lemma are investigated in the following posting. The solution is detailed and well presented. The response received a rating of "5/5" from the student who originally posted the question.