Question: Show that V ( r , t; T ) = Z ( r , t; T ) E f [ gT ] , where V

Show that V (r, t; T )= Z(r, t; T )E
f [gT ], where V is the price of the security, Z is a zero-
coupon bond used as the numeraire, gT is the payoff of the security at maturity T and E
f
is the expectation under the forward risk neutral probability measure. Hint: start with the
relationship between V and V . Explain all assumptions and equations involved.
9

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