Consider a contingent claim whose payoff X_T′ is known at time T′ but it is payable at a later time T , T >T′. Show that the time-t value of the contingent claim is given by

where B(T′,T) is the time-T′ price of the T-maturity discount bond. Give a financial interpretation of the result.

Use the tower property of conditional expectations.

Transcribed Image Text:

XT' E'g [e-li rudu Xp ] = E' [e="rudu XT¹B(T¹, T)], X₁ = El