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Drift Rate


The average increase per unit of time in a stochastic variable. Typically, the drift cannot be detected amid all the up and down movements due to randomness. The drift rate is an function of the volatility of underlying variable. For example, in interest rate swaps, the drift rate is a function of interest rate volatility. As volatility increases, so will the drift rate. The drift rate of zero means that the expected value of an stochastic variable at any future time is equal to the current value.

The standard Brownian motion process has a drift rate of zero (0) and a variance of one (1).



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Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
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