Brownian motion positive at time 1 then negative at 2
Question
A standard Brownian motion starts at . Given that , what is the probability that ?
Short answer
. and are jointly normal with correlation , so . Dividing by gives . Geometrically, the increment must exceed in magnitude, a wedge out of the half-plane.
Adapted from Joshi, Denson & Downes, Quant Job Interview Questions and Answers, Q3.51, p.85; question and answer rewritten by SelfMadeQuant.com.
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