Applied Multidimensional Girsanov Theorem
Quant Advisory Ltd
July 14, 2012
The present article is meant as a bridge between theory and practice concerning Girsanov theorem. In the first part we give theoretical results leading to a straightforward three step process allowing to express an asset's dynamics in a new probability measure. In the following sections we apply this three step process. The first application consists in expressing a foreign asset's dynamics in domestic currency which leads to the well known quanto adjustment formula. The second application is the expression of the forwards' dynamics under Libor Market Model using a unique probability measure. The final application consists in expressing foreign short rate Hull & White dynamics under domestic measure.
Number of Pages in PDF File: 18
Keywords: Girsanov, Multidimensional Girsanov, Quanto Adjustment, LMM Drift, Drift Calculation
JEL Classification: C00, G13
Date posted: April 11, 2011 ; Last revised: March 3, 2015