Past exam of the mathematics course of the University of Cambridge / 2024 / iii / Paper 356 / 2 / b / Solution

Let ${\xi }_{1,n},{\xi }_{2,n}$ be independent random variables with the standard normal distribution. The unconstrained Milstein method step isThe $X$ noise is additive, so its Milstein correction vanishes. The diagonal, independent noise fields commute, so no cross iterated stochastic integral is required.

Implement each reflecting boundary condition for a diffusion by folding the proposed coordinate back into $[-1,1]$. One formula that also handles multiple overshoots isThe complete update isUnder the usual smoothness assumptions, the Milstein discretization has strong order of convergence one and weak order of convergence one. The reflection enforces the boundary pathwise.