In mathematical finance, a risk-neutral measure, also called an equivalent martingale measure, is heavily used in the pricing of financial derivatives due to the fundamental theorem of asset pricing, which implies that in a complete market a derivative's price is the discounted expected value of the future payoff under the unique risk-neutral measure.
Read more about Risk-neutral Measure: Motivating The Use of Risk-neutral Measures, The Origin of The Risk-neutral Measure (Arrow Securities), Usage, Example 1 — Binomial Model of Stock Prices, Example 2 — Brownian Motion Model of Stock Prices
Famous quotes containing the word measure:
“Marching is when the pulse of the hero beats in unison with the pulse of Nature, and he steps to the measure of the universe; then there is true courage and invincible strength.”
—Henry David Thoreau (1817–1862)