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.