In mathematical finance, a risk-neutral measure, also called an equivalent martingale measure, is heavily used in the pricing of financial derivatives due to the fundamental theorem of asset pricing, which implies that in a complete market a derivative's price is the discounted expected value of the future payoff under the unique risk-neutral measure.
Read more about Risk-neutral Measure: Motivating The Use of Risk-neutral Measures, The Origin of The Risk-neutral Measure (Arrow Securities), Usage, Example 1 — Binomial Model of Stock Prices, Example 2 — Brownian Motion Model of Stock Prices
Famous quotes containing the word measure:
“What cannot stand must fall; and the measure of our sincerity and therefore of the respect of men, is the amount of health and wealth we will hazard in the defence of our right. An old farmer, my neighbor across the fence, when I ask him if he is not going to town-meeting, says: “No, ‘t is no use balloting, for it will not stay; but what you do with the gun will stay so.””
—Ralph Waldo Emerson (1803–1882)