1. A review of the IT outsourcing literature Insights for practice

What are State Prices or Pure Securities?

The state price security is also known as pure security or Arrow Debreu security. It is actually a contract that agrees on paying 1 unit of numeraire if precise state occurs at the precise time. However, it pays 0 numeraires on other states.

What is a Risk-neutral probability?

Risk neutral probabilities can be described as the probabilities of the upcoming outcome, which are risk-adjusted. These probabilities are usually used for evaluating estimated asset values. The main benefit of utilizing risk-neutral probabilities is that if the neural risk probabilities are evaluated, then it can be used for pricing the assets that are based over estimated payoff (Kwok, 2008).  However, theoretical risk-neutral probabilities are considered different from the probabilities of the real world. In a risk-neutral scenario, the estimated growth rate of holding contract (future) is 0. The payoff of the contract can be explained as follows:

What does a Martingale mean or imply?

 What is a Markov process?

It is actually a random process that is indexed through time and by the property that the future is autonomous of the past, specified the present. Markov procedure is usually natural stochastic analog of different processes, which is explained through equations. The Markov process is named after the Andrei Markov. The process X can be a Markov Process if

What is an Equivalent Martingale Measure?

It is described as a probability distribution of estimated payments by the investment, which is usually utilized in asset pricing. Such probability distributions are risk-adjusted. The equivalent martingale measure allows the investors to perform a straightforward evaluation of the value of the security. The risk-neutral measure is another name of the equivalent Martingale Measures. The equivalent Martingale measure is used for pricing derivative securities. The reason for this is because such securities have many discrete, dependent payments (Iacus, 2011).

What is an Equivalent Probability measure?

What is the Radon-Nikodym derivative?

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What is Girsanov’s Theorem?

Girsanov theorem shows how stochastic procedure changes when the measure changes to the equivalent probability measure. This theorem has a huge significance in financial mathematics (Hunt & Kennedy, 2004).

What is an Ito Process?

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What is Ito’s Lemma?

 References of Mathematics

Hunt, P., & Kennedy, J. (2004). Financial Derivatives in Theory and Practice (revised ed.). John Wiley and Sons.

Iacus, S. M. (2011). Option Pricing and Estimation of Financial Models with R. John Wiley & Sons.

Kwok, Y.-K. (2008). Mathematical Models of Financial Derivatives (2 ed.). Springer Science & Business Media.