November 1998
Intermediate to advanced
220 pages
6h 36m
English
Content preview from Fixed Income and Interest Rate Derivative Analysis
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154 FIXED INCOME AND INTEREST RATE DERIVATIVE ANALYSIS
risk-neutral
measure as
E B
and define the change by
E~[Xr] - E, E,[mr] x
The superscript B reminds us that all assets expressed as ratios over the
money-market account are martingales under this measure. We thus have
that
Bt
so that the ratio
St/Bt
is a martingale in the risk-neutral measure.
11.6
Change of probability measure
We mentioned previously the T-measure. How do we derive this measure
from the risk-neutral measure? The answer to this question and ones like
it is given from the following change of measure formula. We
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