Solution

ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2018/iii/paper-211/1/b/solution

A pricing kernel is a strictly positive random variable such that is integrable and
It is a one-period state-price density, converting a terminal payoff into its initial price. Strict positivity means almost surely, not merely . When cash has price at both dates, this identity forces , so defines an equivalent martingale measure.

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