ABSTRACT
Consider an arbitrage-free market where asset prices are modelled by a stochastic process
(S t ) t[0,T] , represents the history of the asset S and
t the discounted value
of the asset. In Chapter 9 we saw that in such a market, the prices of all instruments may be computed as discounted expectations of their terminal payoffs with respect to some
martingale measure such that:
Under the pricing rule given by the value t
on an
underlying asset S t is given by:
(11.1)
also called the “risk-neutral” or “risk-adjusted” dynamics of S.
