medium · Quantitative Finance
Under the Girsanov theorem, to transform a process with real-world drift μ into a risk-neutral process with drift r, what is the required market price of risk θ used in the Radon-Nikodým derivative?
- θ = (μ)/(σ) - r
- θ = μ - r
- θ = fracr - μσ^2
- θ = (μ - r)/(σ)
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