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### Solutions to Problems to Work for Understanding

What is the solution of the stochastic differential equation
dY(t) = \mu Y(t) dt + \sigma Y(t) dX
This problem is adapted from Financial Calculus: An introduction to derivative pricing by M Baxter, and A. Rennie, Cambridge University Press, 1996, page 61. We could match both the drift and volaility terms for this SDE to the known SDE for the process \exp(\rho X(t) + \nu t) if and only if we take \sigma = \rho and \vu = \mu - (1/2)\sigma^2. That is, we guess the solution of the SDE to be
Y(t) = \exp( \sigma X(t) + (\mu - (1/2) \sigma^2)t)
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