Interview Question: Ito’s Lemma

Sample Question #20 (applied math – stochastic calculus)

What is Ito’s Lemma? What is its significance in studying stochastic processes? How is it used in finance? Can you write out the equation?

When used to model financial derivatives, what assumptions must be made of the properties of the derivatives for Ito’s Lemma to be applied correctly?

(Comment: Ito’s Lemma is an important concept in modern finance. If you don’t fully understand the math behind it, it’s still okay, as long as you know what it is and what it does.)

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