Interview Question: Stochastic Conversion

Sample Question #128 (mathematics – stochastics)
 
I see you’ve taken an advanced class in [or read an advanced book on] stochastics. Okay, so what’s Girsanov’s Theorem and how is it used in finance?
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One Response to Interview Question: Stochastic Conversion

  1. Brett says:

    ANSWER
     
    Girsanov’s Theorem, first discovered by Cameron-Martin, basically relates a martingale to an alternative probability measure. It’s used in finance to allow us to go from an underlying asset’s price to the price of a risk-neutral derivative.

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