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Message: <blockquote data-quote="Hugolp" data-source="post: 83652" data-attributes="member: 13039">I am reading "Stochastic Calculus for Finance II" by Shreve to learn about Black-Scholes and derivatives. Until now, coming from an engineering background, Im getting everything, but I have what I think is probably a very simple (read stupid) doubt. From page 155: We shall often consider the discounted stock price e^(- rt) s(t) and the discounted portfolio value of an agent, e^(- rt) X(t).Where s(t) is the stochastic ecuation modeling the nominal price of a stock and X(t) the same but for the nominal price of the portfolio. I understand why it can be useful to adjust the price by the (assumed) risk free interest rate since it can give you a better baseline than the nominal price, but what I dont get is why is it an exponential?. Im pretty sure is something very stupid/simple Im missing but since Im studying on my own I dont want to just give it a pass and assume/believe things without understanding them.So can anyone explain me why the discounted price is an exponential? Thanks in advance.</blockquote>