Hello All!
I have some questions regarding the principal of pricing models and i hope someone can help me out here.
The philosophy of pricing models consists of "replication", e.g. the Black-Scholes-Model.
C = Sx - Ky e^(-r+T)
In other words. The fair price of a financial instrument must equal the replication cost of a portfolio that has the same payoff at anytime as the financial instrument. It is also clear that this logical assumption provides no abitrage. Anything else would leed to easy money.
Now i often read about Risk-Neutral-Valuation and how "important" it is when valuingderivatives and that this is the key assumption of the B/S - Model. Everytime i find information about it i read that. In a risk neutral world people are risk neutral... i got it...
and by that a risk less portfolio should earn the risk free rate.... yes sir....
But this all makes no sence for me and i need to link all this information together but i cant some how.. Maybe someone can help me. That would help me very much!
thank you very much
EZ
I have some questions regarding the principal of pricing models and i hope someone can help me out here.
The philosophy of pricing models consists of "replication", e.g. the Black-Scholes-Model.
C = Sx - Ky e^(-r+T)
In other words. The fair price of a financial instrument must equal the replication cost of a portfolio that has the same payoff at anytime as the financial instrument. It is also clear that this logical assumption provides no abitrage. Anything else would leed to easy money.
Now i often read about Risk-Neutral-Valuation and how "important" it is when valuingderivatives and that this is the key assumption of the B/S - Model. Everytime i find information about it i read that. In a risk neutral world people are risk neutral... i got it...
and by that a risk less portfolio should earn the risk free rate.... yes sir....
But this all makes no sence for me and i need to link all this information together but i cant some how.. Maybe someone can help me. That would help me very much!
thank you very much
EZ
