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Results tagged with risk-neutral-measure
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user 7788
A risk-neutral measure is a probability measure that yields an expected present value (discounted at the risk-free rate) which is equal to the current market price. The risk-neutral measure is also called an equivalent martingale measure.
7
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1
answer
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How to use the Girsanov theorem to prove $\hat{W_t}$ is a $\hat{\mathbb P}$-Brownian motion?
Let $T > 0$, and let $(\Omega, \mathscr F, \{\mathscr F_t\}_{t \in [0,T]}, \mathbb P)$ be a filtered probability space where $\mathbb P = \tilde{\mathbb P}$ (risk-neutral measure) and $\mathscr F_t = …
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1
answer
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Prove that the binomial algorithm implies the arbitrage free price at t=0 of a T-claim
In Tomas Bjork's Arbitrage Theory in Continuous Time (or here), $\exists$ these propositions
How does the first formula follow from from the algorithm? I get that $\Pi(0;X) = V_0(0)$, but I don't …
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Accepted
What is the filtration described?
It is the former. Martingales are defined by filtration and probability space*. The probability space* for the filtration need not be the same as the probability space* for the martingale.
I think?
…
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3
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What exactly is/How exactly do we interpret the binomial model's Radon-Nikodym derivative?
Related: Dumb question: is risk-neutral pricing taking conditional expectation?
Maybe there's not quite an interpretation given Lewis' triviality result if $E^Q[X]$ is a real world conditional expect …
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Dumb question: is risk-neutral pricing taking conditional expectation?
Trying to answer my question.
3 incoherently poorly presented goals:
Goal 1: Why $E^{\mathbb Q}[X]$ and not $E^{\mathbb P}[X]$ in computing price, in terms of conditional expectation?
Consider …
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2
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1
answer
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What is the filtration described?
What is the filtration $(\mathfrak{F}_t)$ encircled below?
Is it $(\mathfrak{F}_t) = (\sigma(W_t)) = (\sigma(\tilde{W_t})), t \in [0,T]$?
Or is it $(\mathfrak{F}_t) = (\sigma(\hat{W_t})), t \in [0,T …
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2
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2
answers
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$E[F_T] = F_0$ implies $p = \frac{1-d}{u-d}$? or is implied by?
From Ch 12 in Hull's OFOD, we compute the risk-neutral probabilities for a futures contract:
Later in Ch 17, futures options are valued, and we have the same result:
In relation to Chapt …
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3
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2
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Dumb question: is risk-neutral pricing taking conditional expectation?
Dumb question: is risk-neutral pricing taking conditional expectation? $\tag{1}$
In trying to recall intuition for risk-neutral pricing, I think I read that we should price derivatives risk-neutrall …
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