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If the Balck-Scholes model shares common intuitions with risk-neutral option pricing model (also known as the binomial option pricing model.
If the Balck-Scholes model shares common intuitions with risk-neutral option pricing model (also known as the binomial option pricing model. One of the biggest underlying assumptions of risk-neurtral binomial model is that we live in a risk-neutral world. In a risk-neutral wrold, all investors only demand risk-free return on all assets. Although the risk-neutral assumption is counterfactual, it is brilliant and desirable because the prices of an option estimated by risk-neutral approach are exactly the same with or without the risk-neutral assumption. Why that is the case and how risk-neurtal assumption greatly simplifies the calculaitons of risk-neutral option pricing approach?
