December 2008
Intermediate to advanced
696 pages
21h 40m
English
Content preview from Principles of Financial Engineering, 2nd Edition
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CHAPTER 12
Some Applications of the Fundamental Theorem
1 Introduction
The theorem discussed in the previous chapter establishes important no-arbitrage conditions that permit pricing and risk management using Martingale methods. According to these conditions, given unique arbitrage-free state prices, we can obtain a synthetic probability measure, 
, under which all asset prices normalized by a particular Zt become Martingales. Letting C(St, t) represent a security whose price depends on an underlying risk St, we can write,
(1)
As long as positive ...
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