ABSTRACT
In this chapter we introduce the notion of nume´raire. This allows us to consider pricing under random discount rates using forward measures, with the pricing of exchange options (Margrabe formula) and foreign exchange options (Garman-Kohlagen formula) as main applications. A short introduction to the computation of self-financing hedging strategies under change of nume´raire is also given in Section 10.5. The change of nume´raire technique and associated forward measures will also be applied to the pricing of bonds and interest rate derivatives such as bond options in Chapter 12.
