The risk-neutral probabilities for an asset,with a current value equal to the present value of future payoffs are:
A) given by the probability of each state occurring.
B) given by the value of the underlying asset under good news and the risk free rate.
C) given by the value of the underlying asset under good news and bad news.
D) given by the value of the underlying asset under good news, bad news, and the risk free rate.
E) None of these.

Question

Quizplus · Accepted Answer

Risk-neutral probabilities are derived using the value of the underlying asset under different states (good and bad news) and the risk-free rate to ensure the present value of expected payoffs equals the current asset price.

The Risk-Neutral Probabilities for an Asset,with a Current Value Equal