Explain 'Martingale Pricing' formula.
Explain 'Martingale Pricing' formula.
Approach: Define the fair price as an expectation under a martingale measure.
The price of an asset is the expected value of its future cash flows, discounted by a numeraire, under a measure where the discounted price process is a martingale.
Follow-up: What is a numeraire?
Key concepts: numeraire, expectation, discounting.