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Chapter 16

  • Thread starter Stefania Anastasopoulou
  • Start date
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Stefania Anastasopoulou

Member
Hi all,

I am currently studying the Chapter 16 and a have a few questions

1. In this chapter we are trying to find the price of the derivative in continuous time. Right? So we are using these 5 steps in order to evaluate the price of the derivative. If this is true, why does it say in the summary that these 5 steps are used for the proof of the binomial model? I mean that the binomial model is used for the pricing of a derivative which has a discrete state space in a discrete time

2. What is the difference between the real world probability (p) and the risk-neutral probability?

3. The martingale representation theorem is used for the martingale of q probability?

4. Are there any exercises that will require from us to perform these 5 steps or they are just shown as equivalent steps of the binomial model?

In overall, i can't really understand the use of this chapter

Your prompt response will be highly appreciated.

Thanks,
 
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