ABSTRACT
In Chapter 9, the main results of option pricing in the binomial model were interpreted in the context of discrete-time martingales. In Chapter 13, we carry out a similar program for the Black-Scholes-Merton model, using continuoustime martingales to find the fair price of a derivative. The current chapter provides the necessary tools to implement this program. The main result is Girsanov's Theorem, which guarantees the existence of risk-neutral probability measures, a fundamental construct in the theory of option valuation.
