2.

5 Change of Numéraire 29

V . It suffices to show that, for a one-dimensional predictable process L, the

quantities Lt ∆Vt are in K(S). This is easy, since
 
Lt ∆Vt = Lt Ht0 , ∆St = Lt Ht0 , ∆St ∈ K(S)

by definition of K(S). This shows that K(S ext ) = K(S).

Lemma 2.5.2. Fix 0 ≤ t ≤ T , and let f ∈ K(S) = K(S ext ) be Ft -measurable.

Then the random variable Vft is of the form VfT where f  ∈ K(S).

Proof. Clearly
 
1  f
T
f f 1 VT − Vt
− = f = (Vs − Vs−1 ) .
Vt VT VT Vt VT s=t+1 Vt
T
We see that f  = s=t+1 Vft (Vs − Vs−1 ) belongs to K(S ext ) because Vft is
Ft -measurable and the summation is on s > t. Hence f  = f  + f does the
job.

Proposition 2.5.3. Assume that X is defined as in (2.10). Then

 
f 
K(X) = f ∈ K(S) .
VT 

Proof. We have that g ∈ K(X) if and only if there is a (d+1)-dimensional pre-

T T d+1
dictable process H, with g = t=1 (Ht , ∆Xt ) = t=1 j=1 Htj ∆Xtj . Clearly,
for j = 1, . . . , d and t = 1, . . . , T ,
 j

j Stj St−1
∆Xt = −
Vt Vt−1
j  
∆St j 1 1
= + St−1 −
Vt Vt Vt−1
j
∆Stj S ∆Vt
= − t−1
Vt Vt−1 Vt
1  
= ∆Stj − Xt−1
j
∆Vt .
Vt
   
So we get that Htj ∆Xtj = V1t Htj ∆Stj − Htj Xt−1
j
∆Vt , which is of the
form Vft for some f ∈ K(S ext ) = K(S). For j = d + 1 and t = 1, . . . , T the
same argument applies by replacing Stj and St−1
j
by 1.
f

By the previous lemma we have Vt = VT for some f  ∈ K(S). This shows
f

that K(X) ⊂ V1T K(S).