Solution

ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2016/iii/paper-211/1/a/solution

The natural filtration of is the natural Brownian filtration: since , the equation recovers the entire Brownian motion history from the stock history. For , independent increments and the moment-generating function of a normal distribution give
All these expectations are finite. Since , the martingale identity holds for every exactly when the last exponential equals one. The required logarithmic drift is
This is the distinction between the drift of and the drift of : here the latter is zero.

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