Perhaps this question sounds trivial and obvious, but I am starting to study this new field. When we are in a complete market without arbitrage opportunities there is only one risk-neutral martingale measure $\mathbb{P}^{*}$ and therefore the price of a financial instrument (say a European option) at time $t=0$ with maturity date $T$ can be computed in only one way.

Now suppose that the market is arbitrage free, but there are many risk-neutral measures. what are the tools a firm IN THE REAL WORLD use to pick up the best price for a financial instrument? I make this question because there is not important information that should be taking into account such as budget constraints of the firm and the buyer, the risk of pricing too high, the risk of pricing too low, consistency during the time, etc.

Thanks in advance.



Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.