Nice explanation! This is my first encounter of the subject, but I think it is a very good way to start learning about it. Unless the future experience proves me wrong :) Thanks!
Expectation^Q(discounted payoff) ... Q measure is RN measure ...it means to manufacture fake probability under RN world assumption where people only demand Rf return irrespective of what the risk is. We assumed RN world assumption because there is no model in the world to estimate RiskAverse/RiskAdjusted return ... so it’s reasonable to discount the payoff with Rf only based on PCP framework that we can form portfolio of Rf Bond & Option.
if grandma is risk-neutral world all the time, why her probability changed? shouldn't risk-neutral world probability remain the same? isn't this the key of risk-neutral? care to explain why grandma "r-n" here?
I'm struggling with this in my studies, this anecdote definitely helped! Thanks :)
3:50 (turn on the caption). Thank me later... very constructive explanation.
it is later and I am thanking you
Thank you
Nice explanation! This is my first encounter of the subject, but I think it is a very good way to start learning about it. Unless the future experience proves me wrong :) Thanks!
Nice example !!!
I think you confuse arbitrage free valuation framework with risk neutral probability valuation.
Expectation^Q(discounted payoff) ... Q measure is RN measure ...it means to manufacture fake probability under RN world assumption where people only demand Rf return irrespective of what the risk is.
We assumed RN world assumption because there is no model in the world to estimate RiskAverse/RiskAdjusted return ... so it’s reasonable to discount the payoff with Rf only based on PCP framework that we can form portfolio of Rf Bond & Option.
4:04 Did I hear 70% of chance it's sunny and 70% of chance it's rainy?
70% chance sunny makes the ticket $12, right?
What if it's partly cloudy :0 ? Thanks for the explanation.
if grandma is risk-neutral world all the time, why her probability changed? shouldn't risk-neutral world probability remain the same? isn't this the key of risk-neutral? care to explain why grandma "r-n" here?
Nice and simple. Don't bother about the arbitrage no-arbitrage thing. We all know what you wanted to say. Thanks.
lol thanks, was asked this question in an interview but didn't do well. Hence made this video.