Chapter 14 - The 5-Step Method Flashcards
1
Q
Define a self-financing.
A
A portfolio (A,B), A units of shares and B units of risk-free cash bonds is self-financing if A,B are previsible and dvt= AdSt + BdBt ,
i.e. the required change in the value of the portfolio over each instant of time is equal to the pure instantaneous investment gain.
1
Q
Define Previsible.
A
A portfolio is previsible if it is known based on information up to but not including time t.
i.e. Our shares and cash holdings are know in advance, up to time t.
2
Q
What does is mean for an investment market to be complete?
A
An investment market is complete if for every derivative in that market, there exists a replicating strategy for that derivative
3
Q
Define a replicating Portfolio
A
5
Q
Define equivalent probability measure
A
