Notes say "We can use an argument similar to the original derivation of the Black-Scholes model to demonstrate that
B(t,T) =E[ exp{ -S.r(u).du}|r(t) ] "
where E[] is using prob neutral measure
and S is integrating between (t,T)
Last time we were putting derivatives in terms of shares & bonds, which was possible because all were martingales under the risk free measure. From there we could value the derivative, indirectly.
now we are putting bonds in terms of ??
does anybody know what the "similar argument" is?
Last edited by a moderator: Apr 29, 2008
