The example concludes this because the conditional expectation of the discounted time-3 stock price, given information at time 2, equals the discounted time-2 stock price. Specifically, E2[(1+r)3S3]=82.64 and (1+r)2S2=82.64, satisfying the martingale condition Mn=En[Mn+1].
Conditions: The expectation is taken under the risk-neutral probability p=2/3.; Discounting uses the interest rate r=0.1.
The example concludes this because the conditional expectation of the discounted time-3 stock price, given information at time 2, equals the discounted time-2 stock price. Specifically, E2[(1+r)3S3]=82.64 and (1+r)2S2=82.64, satisfying the martingale condition Mn=En[Mn+1].
Conditions: The expectation is taken under the risk-neutral probability p=2/3.; Discounting uses the interest rate r=0.1.