Stack Exchange Network

Stack Exchange network consists of 175 Q&A communities including Stack Overflow, the largest, most trusted online community for developers to learn, share their knowledge, and build their careers.

Visit Stack Exchange

Questions tagged [risk-neutral]

The tag has no usage guidance.

2
votes
1answer
61 views

How to handle bid-offer spread causing negative estimations of risk-neutral densities from option prices?

I have attempted to estimate the risk-neutral probability density, from CBOE options prices on S&P500 from 2010 to 2016, using the following approximation from Hull (2018). For call options on a ...
2
votes
0answers
123 views

Risk neutral drift in presence of xccy basis

Suppose I invest in an EUR denominated fund. This fund invests fully in USD stocks and doesn't hedge it's FX exposure (i.e. the EUR value of this fund is just equal to the USD value of the holdings ...
4
votes
1answer
350 views

Why must the risk free rate be free from risk in risk neutral valuation?

I am reading through documentation related to Funding Valuation Adjustments (FVA) which discuss risk free rate and funding matters and the following question came to my mind: in risk neutral valuation ...
1
vote
1answer
803 views

Simulation of the geometric Brownian motion under risk-neutral measure

I hope you can help me again. It is clear how to simulate the GBM: $S_{t_{k}}=S_{t_{k}}exp[(\mu-\frac{\sigma^2}{2})\Delta t_{k+1}+\sigma\sqrt{\Delta t_{k+1}}Z]$, where Z is a stand. norm. dis. RV. ...
4
votes
1answer
58 views

Fees on derivatives

Since it's obviously not at their fair value that derivatives are priced, how do investment banks compute the fees that they add on top of the risk neutral price ?
1
vote
1answer
157 views

BSM Model - Actual probability

Actual probability of exercise of put option under BSM model is: PD = N(-d2(u)) (using expected return of stock, u) Risk-neutral equivalent is ...
5
votes
2answers
385 views

Do futures follow physical or risk-neutral distributions

I've spent a while looking for an answer to this question and while I feel it is a simple question I have not found an answer. I know prices of option contracts follow an implied, risk-neutral ...
-3
votes
1answer
432 views

Risk Neutrality Necessary for Dual Delta Calculation?

I have an option chain for a specific expiry date. Then calculate dP/dK numerically for each pair of strikes. My hunch is that this calculation is not risk neutral in the strictest sense of the word ...
7
votes
1answer
3k views

Radon-Nikodym derivative and risk natural measure

I need help with my understanding of changing probability measure. Im not a mathematician so I hope for answers that are not too technical. As shown in this Wikipedia article http://en.wikipedia.org/...
1
vote
1answer
323 views

Prove that the binomial algorithm implies the arbitrage free price at t=0 of a T-claim

In Tomas Bjork's Arbitrage Theory in Continuous Time (or here), $\exists$ these propositions How does the first formula follow from from the algorithm? I get that $\Pi(0;X) = V_0(0)$, but I don't ...
7
votes
2answers
2k views

T-Forward Price on risk-neutral measure

i have and question concerning the T-forward price definition on the Robert J.Elliot's book : Mathematics of Financial Markets. On his chapter 9, definition 9.1.3 p.249. He give the formula without ...
3
votes
0answers
139 views

Estimating risk aversion (power or exponential utility) from options prices

I came across this literature and it seems like there are a number of ways people do this. You can do it for an option on any underlying as long as you can create the risk-neutral p.d.f. If you agree ...