Change of Numeraire

Carl Chiarella, Xuezhong (Tony) He () and Christina Sklibosios Nikitopoulos
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Christina Sklibosios Nikitopoulos: University of Technology Sydney

Chapter Chapter 20 in Derivative Security Pricing, 2015, pp 419-430 from Springer

Abstract: Abstract Many computational applications of derivative pricing models such as the determination of derivative prices by simulation or the estimation of derivative pricing models can be significantly simplified by a change of numeraire. In this chapter we discuss the main idea behind the change of numeraire technique and the formation of equivalent probability measures under which options can be priced. In addition, the connection of the associated numeraires via the Radon–Nikodym derivative are presented. We also consider an application of the technique for the option pricing models with stochastic interest rate discussed in Chap. 19 and an extension of the technique to accommodate multiple sources of risk in the dynamics of the underlying assets is also considered.

Keywords: Option Price; Wiener Process; Risky Asset; Dividend Yield; Bond Price (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:dymchp:978-3-662-45906-5_20

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DOI: 10.1007/978-3-662-45906-5_20

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