Risk-Neutral Pricing
Value discounted payoffs under a measure that removes risk premia.
Build the mental model first.
Change the probability lens so tradable assets grow at the funding rate after carry. Then discount the expected payoff.
Value discounted payoffs under a measure that removes risk premia.
Now make it exact.
Notation and units
Decimal rates and volatilities, year-fraction time and continuous compounding unless stated otherwise.
Every model has a price.
Educational conventions are stated explicitly and may simplify market quotation or settlement details.
Rates are continuously compounded unless the section says otherwise.
Inputs are deterministic in the base model.
“An unstated convention is a future reconciliation break.”— THEQUANTBATEMAN
Why a quant cares.
This is the common pricing spine of derivatives desks, not a claim that investors are actually risk neutral.
The hedge has opinions.
Start with the quote convention, then ask which Foundations risk survives the hedge. A number without its convention is merely well-dressed ambiguity.
Ask Bateman about this model →