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ch - 14 State Price Deflator.

S

skharki1

Member
In Chapter 14, under state price deflator, it is stated that p > q.
Can someone please explain will the price of an option will be the same under both or the price of an option in case of p will be greater?
 
skharki1 said:
Can you please explain how and why.
Click to expand...

The short explanation is that :
Payoff * Risk neutral probability * Discount factor using risk free rate =
Payoff * Real world probability * Stochastic discount factor (also known as state price deflator)
 
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