Questions tagged [numerairechange]

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70 views

How do we determine the “correct measure”?

Frequently I come across the statement that the "correct measure" for a product is this-or-that measure. For example, Eurodollar Futures or Stock returns - Risk neutral measure Libor forward rate - T-...
101 views

Intuition for consistent Derivative Prices under different Numeraires and Measures

This is essentially the Fundamental Theorem, however I am not asking for a thorough proof, I am more interested in the general intuition. In words, it makes sense that whatever your unit of account (...
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Intuition for Stock Price Numeraire Drift

I would like to ask whether there is an intuition for the drift of price processes under the Stock numeraire. I find it intuitive that the martingale measure under the Money Market numeraire induces ...
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In a multi-curve context which numéraire is used to change to the payment probability of a forward asset X paid at time T?

Should it be the coupon associated to the funding curve of the asset? Thanks.
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Discrete term structure models - generalized procedure to ensure positive probabilities across multiple measures

Question: Is there a generalized procedure for building a discrete (e.g. binomial) term structure model with risk-neutral branching probabilities that ensure positive probabilities under alternative ...
141 views

Drift term in rough volatility models

I'm studying rough volatility papers and was wondering, why the drift term is always missing. See for example the paper Pricing under rough volatility by Bayer, Friz, Gatheral. On page 2, the ...
416 views

Change of numeraire between T-forward and Bank Account

I follow a course, and get to the point that one bond price discounted by another one is a martingale: $$\frac{P(t,T_0)}{P(t,T_1)} - \text{ is a } \mathbb{Q}^{T_1} \text{ martingale }$$ I can not ...
131 views

Pricing a call option with pay-off function max{$S_T - S_{T/2}, 0$}

Pricing a call option with payoff function $C=\max\{S_T - S_{T/2}, 0\}$, where $S_T$ is geometric brownian motion. I appreciate any help! Please close this question if this is a duplicated question. ...
163 views

Dividend paying asset, why can't be taken as numéraire?

Why when considering numéraires, one cannot use a dividend paying asset to define a risk neutral measure? Here's where I got my question : (Shreve - Stochastic Calculus For Finance II)
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Bond SDE under its own forward measure

I am trying to write the SDE for a forward bond, $dP(t,T_1,T_2)$, under the $T_1$-Forward measure, $Q_{T_1}$. I can easily do this by: Writing the equation of $dP(t,T_1)$ and $dP(t,T_2)$ under the ...
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Change of numeraire in options with currency exchange features

FV of an EUR denominated option under "COP" risk measure is given by: $$V_t^{COP} = D^{COP} \mathbb{E}_t^{COP} \left[X_T(S_T -K)^+\right]$$ where $X_T$ is the exchange rate COP/EUR. Pricing the ...
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Does numeraire have to be a tradable asset

I thought we create replicating portfolios using underlying and the numeraire i.e. the numeraire has to be a tradable asset (assuming simple binomial model). But I have seen some examples which ...
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What is the numeraire for the real world measure $\mathbb{P}$?

We know the numeraires for the forward measure, the risk-neutral measure, etc. What is the numeraire for the real world measure $\mathbb{P}$?
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Change of numéraire for non-Normal distributions

I'm looking for a resource, a book or an article, that describes the framework of change of numéraire in a broader context than just Brownian motions or Normal distributions. I'm only really ...