Abstract
This Chapter reviews some basic elements from asset-pricing theory thus establishing the theoretical foundations of the techniques presented in this book. First, we explain the principles of arbitrage pricing of financial derivatives.’ The most important implication for our purpose is that derivative prices can be expressed as conditional expectations by transforming the probability measure for the stochastic process of the underlying asset prices. This result can be derived by a replication argument that shows how the pay-off function of the derivative can be replicated by an appropriate portfolio of stocks and bonds.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 2003 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Mandler, M. (2003). Arbitrage Pricing and Risk-Neutral Probabilities. In: Market Expectations and Option Prices. Contributions to Economics. Physica, Heidelberg. https://doi.org/10.1007/978-3-642-57428-3_2
Download citation
DOI: https://doi.org/10.1007/978-3-642-57428-3_2
Publisher Name: Physica, Heidelberg
Print ISBN: 978-3-7908-0049-4
Online ISBN: 978-3-642-57428-3
eBook Packages: Springer Book Archive