Question: Consider a contingent claim whose payoff X T is known at time T but it is payable at a later time T , T

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

XT' E'g [e-li rudu Xp ] = E' [e=

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.

XT' E'g [e-li rudu Xp ] = E' [e="rudu XTB(T, T)], X = El

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