 Solution

This part's conditional-expectation representation is its own hypothesis; it does not need the incorrect unrestricted claim in part (b). Fix $T$, and writeThe assumed representation makes $M(T)$ a martingale. The stochastic Fubini theorem givesApply the Itô formula to $e^{-I}$ and use the equation for $U$ from part (a), including the cross-variation. The result isUniqueness of the continuous semimartingale decomposition makes the drift vanish. Initially this is a $dtd\mathbb{P}$ statement; the assumed continuity in time and maturity extends it to the continuous versions simultaneously. Let $T\downarrow t$ to obtainSubstitute back and differentiate the maturity integrals using their continuous integrands:This is the forward drift restriction for square-root stock claims. The $-{\sigma }_t/2$ term comes from the product cross-variation and must be retained. For the uninformative zero-stock case, the representation does not identify $f$; as usual a positive initial stock price is understood.