Can you please tell me whether if I can used risk-neutral pricing approach to price a stock or a bond ? (i.e. discount with risk free rate the future cashflows) ?

Thank you very much!


1 Answer 1


In essence, risk neutral pricing is based on the idea of 'replication' - the instrument that is being valued can be created artificially by other instruments already available. It is kind of like saying that if I can make an orange from 2 apples and 3 mangoes, then price of an orange better by twice the apple price added to thrice the mango price.

As bonds/stocks are basic instruments you can't really replicate, you cannot use risk neutral pricing to value these. Note that they will still obey the expectations with the risk neutral probabilities (i.e. price of the stock today will be discounted average of stock price possibilities tomorrow, over the risk neutral probabilities; but you can't really use this to price the stock itself, since you need the stock price to find these probabilities).


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.