Chapter 12
The Martingale Measure
Part I
Chapter 12 develops the notion of Martingale Pricing, also referred to as the technique of ‘risk-neutral valuation,’ in a general setting of finite dates and states. Risk-neutral valuation modifies the probabilities by which future expected cash flows are computed, in such a way that discounting at the risk-free rate of interest is legitimate.
Keywords
Risk-neutral valuation; cash flow; risk-free rate; Arrow–Debreu; payoff
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