28.6 Extension to Many Underlying Variables When there are several underlying variable 0, We reduce the growth rate of each one by its market price of risk times its volatility and then behave as though the world is risk-neutral Note that the variables do not have to be prices of traded securities Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 28.6 Extension to Many Underlying Variables • When there are several underlying variable qi we reduce the growth rate of each one by its market price of risk times its volatility and then behave as though the world is risk-neutral • Note that the variables do not have to be prices of traded securities
Estimating the market price or a7 Risk(equation 28.7, page 665) The market price of risk of a variable is given by 入=+(μm-r) where p is the instantane ous correlation between percentage changes in variable and returns on the market; om is the volatility of the market s return; um is the expected return on the market and r is the short -term risk-free rate Options, Futures, and other Derivatives, 5th edition 2002 by John C. Hull
Options, Futures, and Other Derivatives, 5th edition © 2002 by John C. Hull 28.7 Estimating the Market Price of Risk (equation 28.7, page 665) risk -free rate return on the market; and i s the short -term of the market' s return; i s the expected and returns on the market; i s the volatility between percentage changes i n variable where i s the instantane ous correlation The market price of risk of a variable i s given by r r m m m m − l = ( )