Drifted Brownian motion: hit 3 before -5
Question
Let , where is standard Brownian motion and is a constant drift, starting from .
(a) What is the probability that reaches before it reaches ?
(b) Now remove the upper barrier and suppose . What is the probability that ever reaches ?
Short answer
(a) (or if ); (b) . is a martingale, so optional stopping gives , which solves for . For (b), let the upper barrier go to infinity: the hitting probability of becomes .
Adapted from Zhou, A Practical Guide to Quantitative Finance Interviews, sec. 5.4 Brownian Motion and Stochastic Calculus, 'Stopping time C', p.132; question and answer rewritten by SelfMadeQuant.com.
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