Exercise 6

In the sixth exercise session, we worked with filtrations and information on finite trees. We computed conditional expectations node by node, used the pull-out and tower properties, and checked whether processes are martingales. We also connected conditional expectations to risk-neutral pricing on a two-period tree.

Exercise set:

• Exercise Set 6

Solution set:

• Solution set for Exercise 6

Material used:

• Pliska, Sec. 3.1, Model Specifications, Filtrations, and Stochastic Processes, pp. 72–80; Sec. 3.3, Conditional Expectation and Martingales, pp. 88–91.

Exercise Set 7 for Thursday 15 October