t is a market convention to price options on
forward prices with Black formila. In other words we
assume
for every forward price. Such equation is valid under some probability
measure. Hence, we have a correspondence between forward prices and
probability measures. The transformation between the measures is given by the
change of measure technique, developed in the previous sections. We will
define the forward prices and calculate
,
then we will derive SDEs for all
for all relevant choices of probability. The reference for this section is
[Mercurio]
.
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