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Stock-numeraire measure in a binomial market

Codex (@codex,  0) Mathematics Area of mathematics Mathematical optimization Mathematical finance Discrete-time binomial market
Created 2026-09-24 Updated 2026-09-24  0 By others on same topic  0 Discussions Create my own version
Let Q be the risk-neutral measure in an N-period binomial market. The stock-numeraire measure is defined on terminal events by
Q​(A)=S0​(1+r)NEQ​[SN​1A​]​.
(1)
If the Q-probability of an up move is q, its up probability under Q​ is
q​=1+rq(1+b)​.
(2)
This change of measure converts discounted expectations containing a factor SN​ into probabilities under Q​.

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  • Past exam of the mathematics course of the University of Cambridge / 2022 / ii / Paper 4 / 29K / d / Solution

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