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The Skinny on Options: Abstract Applications

Risk Neutral Pricing

The Skinny on Options: Abstract Applications

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Many financial models price their assets with an underlying assumption of risk aversion baked into the mathematics. In fact, the volatility shock component of Geometric Brownian Motion effectively proves this to be true. However, Option Pricing Models, such as Black-Scholes, more often assume risk neutrality in their pricing.

Why is there a discrepancy between these two states, and when is one needed over the other? In today’s Skinny, we address those questions.

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