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Risk-Neutral Pricing

In: Mathematical Financial Economics

Author

Listed:
  • Igor V. Evstigneev

    (University of Manchester)

  • Thorsten Hens

    (University of Zurich)

  • Klaus Reiner Schenk-Hoppé

    (University of Manchester)

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.

Suggested Citation

  • Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2015. "Risk-Neutral Pricing," Springer Texts in Business and Economics, in: Mathematical Financial Economics, edition 127, chapter 12, pages 115-123, Springer.
    • Handle: RePEc:spr:sptchp:978-3-319-16571-4_12
    DOI: 10.1007/978-3-319-16571-4_12
    as

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