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Quantitative Finance · Glossary

What is Change of numeraire?

Definition 5.5 Quantitative Methods · Chapter 5 — Girsanov and Changes of Numeraire

A change of numeraire replaces one numeraire and its equivalent martingale measure by another numeraire and the measure under which prices divided by it are martingales; prices are unchanged, only the unit and the measure in which they are computed change.

Numeraires the series uses, their equivalent martingale measures, and what becomes a martingale under each: pricing a claim means choosing the numeraire that makes the claim’s ratio simplest.
Figure 5.2. Numeraires the series uses, their equivalent martingale measures, and what becomes a martingale under each: pricing a claim means choosing the numeraire that makes the claim’s ratio simplest.
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