Hi, potentially showing a lack of understanding of these concepts but could someone please help me understand the below. Any help is much appreciated.
This question is related to Question 5 April 2023.
I understand that
- a martingale has zero drift, i.e. mu in the SDE = 0.
- to show that something is an equivalent martingale measure, we need to demonstrate that the discounted asset price is a martingale
In Question 5 in April 2023
When solving for c, we set the drift parameters equal to each other, rather than to 0 as I attempted. So the resulting drift parameter is equal to the risk free rate.
So does that mean an equivalent martingale measure is not a martingale because the drift is not zero.
However if we discounted an equivalent martingale measure would we get a drift of zero.
Thanks in advance.
This question is related to Question 5 April 2023.
I understand that
- a martingale has zero drift, i.e. mu in the SDE = 0.
- to show that something is an equivalent martingale measure, we need to demonstrate that the discounted asset price is a martingale
In Question 5 in April 2023
When solving for c, we set the drift parameters equal to each other, rather than to 0 as I attempted. So the resulting drift parameter is equal to the risk free rate.
So does that mean an equivalent martingale measure is not a martingale because the drift is not zero.
However if we discounted an equivalent martingale measure would we get a drift of zero.
Thanks in advance.