The risk-neutral pricing of options
A) Assumes investors are neutral to risk.
B) Assumes some investors are risk-neutral and others risk-loving, but on average they are neutral to risk.
C) Is a no-arbitrage pricing approach.
D) Is valid only in a world with risk-neutral investors and not in the real world.

Question

Quizplus · Accepted Answer

Risk-neutral pricing of options is a no-arbitrage pricing approach. It assumes a risk-neutral world where no arbitrage opportunities exist, and prices are determined based on expected future values discounted at a risk-free rate. It does not assume anything about the risk preferences of investors in the real world.

The Risk-Neutral Pricing of Options