# Questions tagged [risk-neutral-measure]

A risk-neutral measure is a probability measure that yields an expected present value (discounted at the risk-free rate) which is equal to the current market price. The risk-neutral measure is also called an equivalent martingale measure.

452 questions
Filter by
Sorted by
Tagged with
58 views

### Relationship between Beta distribution and its inverse

I am attempting to transform a real world density into risk-neutral density via calibration through the beta distribution. Calibration in this context is transforming the rw density into the rn ...
52 views

### Complete market price and incomplete market price specification

We know that if a liquid market of an asset exists, then the standard derivative pricing theorem implies an equivalent martingale measure exists, not necessarily unique, under which the discounted ...
• 419
151 views

### Use of Non-Risk-Neutral Measure for Pricing Derivatives

While trying to understand the risk-neutral pricing of derivatives when the underlying is the spot price of a commodity, I encountered the situation that the measure used for pricing derivatives is ...
• 41
85 views

### Looking for Options Which Pay Exactly When A Random Barrier is Reached

Supper that I fix two barriers $a<b$ and I consider a price process $X_.$ starting in the interval $(a,b)$. Let V be a payoff function and let $\tau:= \inf \{t>0: X_t\not\in (a,b)\}$. Are there ...
• 373
1 vote
77 views

### Functional Form of Radon-Nikonym Derivative

Suppose I have empirical values of dQ/dP in the context of risk-neutral and real-world probabilities of asset returns. Would it be possible to fit a functional form of the derivative? I'm particularly ...
61 views

### Call Option, Delta and Expected Payoff

In Dynamic Hedging by N. Taleb, at pag. 283-284, there is an argument about the relationship between risk neutral evaluation of a binary call and the delta about a call. The author states that: ...
• 241
47 views

### Justification of the Risk Neutral Measure in the Schwartz One Factor Commodity Model

I have been trying to understand the form of the risk neutral measure in the Schwartz one factor model for commodities (Model 1 on page 6 here) where the spot price of a commodity follows the process ...
58 views

### Arbitrage-Free, Breeden-Litzenberger and Risk-Neutral Measure

Let $\sigma_{\text{BS}}(K, T)$ a given IV slice at $T$, which is implied by a price slice $C(K, T)$. From this price slice, we can infer the Risk Neutral density of the price distribution at $T$ using ...
• 171
107 views

308 views

### Questions about the replicating portfolio in the binomial model

I'm starting to teach myself quantitative finance and I've got several questions (marked in bold) regarding the replicating portfolio of a security in the binomial model. I'm following, among others, ...
• 131