risk-neutral means..illustrated by CIP

Background — all of my valuation procedures are subjective, like valuing a property, an oil field, a commodity …

Risk-Neutral has always been confusing, vague, abstract to me. CIP ^ UIP, based on Mark Hendricks notes has an illustration —

  • RN means .. regardless of individuals’ risk profiles … therefore objective
  • RN means .. partially [1] backed by arbitrage arguments, but often theoretical
    • [1] partially can mean 30% or 80%
    • If it’s well supported by arbitrage argument, then replication becomes theoretical foundation of RN pricing

 

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