Numéraire (Ofer Abarbanel online library)

The numéraire (or numeraire) is a basic standard by which value is computed. In mathematical economics it is a tradable economic entity in terms of whose price the relative prices of all other tradables are expressed. In a monetary economy, acting as the numéraire is one of the functions of money, to serve as a unit of account: to provide a common benchmark relative to which the worths of various goods and services are measured.

Using a numeraire, whether monetary or some consumable good, facilitates value comparisons when only the relative prices are relevant, as in general equilibrium theory. When economic analysis refers to a particular good as the numéraire, one says that all other prices are normalized by the price of that good. For example, if a unit of good g has twice the market value of a unit of the numeraire, then the (relative) price of g is 2. Since the value of one unit of the numeraire relative to one unit of itself is 1, the price of the numeraire is always 1.

References

  • Farshid Jamshidian (1989). “An Exact Bond Option Pricing Formula”. The Journal of Finance. 44: 205–209. doi:10.1111/j.1540-6261.1989.tb02413.x.
  • Helyette Geman; Nicole El Karoui; J.C. Rochet (1995). “Changes of Numeraire, Changes of Probability Measures and Pricing of Options”. Journal of Applied Probability. 32: 443–458. doi:10.2307/3215299.
  • Damiano Brigo; Fabio Mercurio (2006) [2001]. Interest Rate Models – Theory and Practice with Smile, Inflation and Credit (2 ed.). Springer Verlag. ISBN 978-3-540-22149-4.

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Ofer Abarbanel online library

Ofer Abarbanel online library

Ofer Abarbanel online library