t is a market convention to price options on
forward prices with Black formula. In other words we
assume
for every forward price. The
is a standard Brownian motion with respect to some probability measure,
selected differently for every
.
Thus, we have a correspondence between forward prices and probability
measures. The transformation between the measures is given by the change of
measure technique, developed in the previous sections. We will define the
forward prices and calculate
,
then we will derive SDEs for all
for all relevant choices of probability. The reference for this section is
[Mercurio]
.
