The one-period <spot interest rate> is defined by
$$
1+r_t=\frac1{P_t^{t+1}},
$$
and the <bank account> by
$$
B_0=1,
\qquad
B_t=\prod_{s=0}^{t-1}(1+r_s).
$$
A probability measure $Q$ equivalent to the physical measure is a <risk-neutral measure> when every discounted <zero-coupon bond> price
$$
\frac{P_t^T}{B_t},\qquad0\leq t\leq T,
$$
is a $Q$-martingale. Equivalently,
$$
P_t^T=B_t\mathbb E^Q[B_T^{-1}\mid\mathcal F_t].
$$

Solution

Past exam of the mathematics course of the University of Cambridge / 2019 / iii / Paper 211 / 5 / b / Solution

 Solution

ID: past-exam-of-the-mathematics-course-of-the-university-of-cambridge/2019/iii/paper-211/5/b/solution