# Homework Help: Change of Variable

1. Feb 10, 2007

### Bazman

Hi,

I have to change the variable in the following eqn, although I know the answer I cannot see how the answer was arrived at:

-dF = -rF + (r- delta)SdF+0.5(theta^2)(S^2)d^2F
dt dS dS^2

We then want to change to X=1/S F(S,t)=Sf(X,t)

-df = -deltaf + (delta- r)Sdf+0.5(theta^2)(S^2)d^2f
dt dS dS^2

Now the way I see it:

-dF = -Sdf part 1
dt dt

-rF = -r.S.f not sure how this becomes delta? part 2

(r-delta)SdF=(r-delta)S^2df. dX=(delta-r)S^2df . 1
dS dX dS dX S^2

=(delta-r)df .1 (when you divide through with the S from part 1)
dX S

=(delta-r)df. X part 3
dX

Lastly

.5(theta^2)S^2d^2F=.5(theta^2)S^3d^2 .dX^2
dS^2 dX^2 dS^2

=(.5*theta^2).S^3.d^2f . -2
dX^2 X^3

=theta^2.d^2f .X where the .X comes from dividing through by S from part 1
dX^2

= part 4

Part 4 clearly is wrong but I'm not sure where I've made the mistake?