How can we use real probabilities for pricing derivatives
How can we use real probabilities for pricing derivatives?
Expert
Yes and no. There are many reasons why risk-neutral pricing does not work perfectly in practice, since markets are incomplete and dynamic hedging is not possible. If you cannot continuously dynamically hedge so you cannot remove risk and so risk neutrality is not too relevant. You might be tempted to try to price by using real probabilities in its place. It is fine, and there are plenty of theories on such topic, generally with some element of utility theory regarding them. For illustration, some theories exercise concepts from Modern Portfolio Theory and look at real averages and real standard deviations.
From books of Aggarwal Bors, following information has been extracted: Rs. Sales 2,40,000 Variable costs 1,44,000 Fixed costs 26,000 Profit before tax 70,000 Rate of tax
In the year of 1995, a working group of French chief executive officers was set up by the French Association of Private Companies (AFEP) and Confederation of French Industry (CNPF) to study the French corporate governance structure. The group reported the prov
On the contrary to the U.S., Japan has felt continuous current account surpluses. What could be the foremost causes for these surpluses? Is it desirable to have continuous current account surpluses? Japan's continu
How is Crash Metrics deal?
When can you say that the U.S. dollar and the Canadian dollar have achieved purchasing power parity?
The riskiness of portfolios should be looked at in a different way than the riskiness of individual assets. Explain.
Explain the uncertain volatility.
How can a financial manager decide whether to accept or to reject proposed capital budgeting projects for a given MCC and IOS?
What are the difference between Capital Asset Pricing Model and Markowitz’s Modern Portfolio Theory?
What is the meaning of “U.S. dollar weakens in the foreign exchange market”?
18,76,764
1944241 Asked
3,689
Active Tutors
1433775
Questions Answered
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!