Risk-neutral probabilities are defined as the specific set of probabilities chosen precisely to make the discounted price process of any asset a martingale. They are not derived from historical data or investor beliefs, but from the mathematical requirement that discounted prices behave like fair games.
Conditions: Operating within a risk-neutral valuation framework.; Prices are discounted at the risk-free rate.
Risk-neutral probabilities are defined as the specific set of probabilities chosen precisely to make the discounted price process of any asset a martingale. They are not derived from historical data or investor beliefs, but from the mathematical requirement that discounted prices behave like fair games.
Conditions: Operating within a risk-neutral valuation framework.; Prices are discounted at the risk-free rate.