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, which assumes that there are no opportunities for risk-free profits. It does not assume that investors are actually neutral to risk, but rather that they are indifferently to risk when determining the prices of securities. Therefore, option prices derived through risk-neutral pricing are valid in the real world, even if investors are not actually risk-neutral.

The Risk-Neutral Pricing of Options