I was wondering if people could give me examples of how stochastic processes are seen and used in research in real life.
2026-04-09 07:14:43.1775718883
Stochastic Process Examples
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You can apply the concepts to pricing stock options. A stock option includes items such as puts and calls.
Let's consider what a call option is, based on some stock, let's say in Atari. A call agreement will include the type of stock (Atari), a strike price, a premium, and the date of expiration, call it T. The strike price is what the call allows us, or gives us the right, to buy at strike, at expiration.
We can hold the option, then, at time T, if the strike price is lower than whatever the price is at that time, we can exercise our right to buy at strike, than sell it for the price at that time, thus giving a profit. If the price had dropped below strike, we would simply not exercise the option, and let it expire. Thus, we cannot lose.
Therefore, we must have payed some positive premium for this call option.
The future price is random. We must use stochastics to price the option.