Which of the following is an assumption in derivative valuation models?

Question

Quizplus · Accepted Answer

This assumption is the basis of the replication method used in several derivative valuation models, which aims to create a portfolio that replicates the cash flows of the derivative being evaluated. Choices A, B, and D are not assumptions in derivative valuation models. Choice A is not necessarily true as some arbitrageurs may have significant financial resources and access to multiple markets. Choice B is not entirely true as risk can arise from various sources beyond mispricing of derivatives. Choice D is not always true as some trades may not involve transaction charges.

Which of the Following Is an Assumption in Derivative Valuation