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Results tagged with risk-neutral-measure
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user 19004
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.
5
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Why must a riskless portfolio earn the risk-free rate?
In Options, Futures and Other Derivatives when Hull introduces the risk-neutral approach to pricing European options in the one-step binomial model, he claims that
Riskless portfolio must, in the …
- 913
2
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Why can only non-dividend paying assets serve as numeraire?
In Kerry Back, A Course in Derivative Securities, Sect. 1.4 (page 29), the author stated the FTAP in the following form (in boldface):
If there are no arbitrage opportunities,
then for each (non …
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4
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Do *all* non-dividend paying assets have the risk-free instantaneous return rate under the r...
For simplicity let's consider a 1D BS world. The only source of randomness comes from the Brownian motion dynamics $dB_t$. The risk-free rate is $r$ (one may assume it as constant for the time being). …
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How to determine the risk-neutral measure in a Heston model?
To clarify, I'm quite familiar with the risk-neutral pricing framework, and I know one can efficiently Monte-Carlo a Heston model via the non-central $\chi^2$ distribution approach. But so far we're o …
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