Risk-Neutral Pricing

Igor V. Evstigneev, Thorsten Hens and Klaus Schenk-Hoppé
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Igor V. Evstigneev: University of Manchester
Thorsten Hens: University of Zurich

Chapter 12 in Mathematical Financial Economics, 2015, pp 115-123 from Springer

Abstract: Abstract In this chapter the concept of a risk-neutral probability measure is introduced and the relation between the no-arbitrage pricing and risk-neutral pricing is explained. The highlight of the theory presented is the Fundamental Theorem of Asset Pricing, establishing the equivalence of the no-arbitrage hypothesis and the existence of a risk neutral measure. A formula expressing NPV through discounted gain is derived and tools for constructing risk-neutral measures based on this formula are developed.

Keywords: Risk-neutral Probability Measure; Hedging Contingent Claims; Self-financing Trading Strategy; Hedging Derivative Securities; Asset Pricing Theorem (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-319-16571-4_12

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DOI: 10.1007/978-3-319-16571-4_12

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