Application To Finance
In finance, Girsanov theorem is used each time one needs to derive an asset's or rate's dynamics under a new probability measure. The most well known case is moving from historic measure P to risk neutral measure Q which is done - in Black Scholes framework - via Radon–Nikodym derivative:
where r denotes the instanteaneous risk free rate, the asset's drift and its volatility.
Other classical applications of Girsanov theorem are quanto adjustments and the calculation of forwards' drifts under LIBOR market model.
Read more about this topic: Girsanov Theorem
Famous quotes containing the words application to, application and/or finance:
““Five o’clock tea” is a phrase our “rude forefathers,” even of the last generation, would scarcely have understood, so completely is it a thing of to-day; and yet, so rapid is the March of the Mind, it has already risen into a national institution, and rivals, in its universal application to all ranks and ages, and as a specific for “all the ills that flesh is heir to,” the glorious Magna Charta.”
—Lewis Carroll [Charles Lutwidge Dodgson] (1832–1898)
“Most people, no doubt, when they espouse human rights, make their own mental reservations about the proper application of the word “human.””
—Suzanne Lafollette (1893–1983)
“A bank is a confidence trick. If you put up the right signs, the wizards of finance themselves will come in and ask you to take their money.”
—Christina Stead (1902–1983)