Setup

Let

$$ dZ_t=X_t\,dt+Y_t\,dB_t, $$

and let $f\in C^2$.

Formula

Then

$$ df(Z_t)=f'(Z_t)\,dZ_t+\frac12 f''(Z_t)\,d\langle Z\rangle_t. $$

Substituting

$$ d\langle Z\rangle_t=Y_t^2\,dt $$

gives

$$ df(Z_t)

\left(f’(Z_t)X_t+\frac12 f’’(Z_t)Y_t^2\right)dt + f’(Z_t)Y_t,dB_t. $$

Martingale test

The $dB_t$ term is the martingale part. If the $dt$ coefficient is zero, then $f(Z_t)$ is a martingale.