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Risk-neutral valuation

German: Risikoneutrale Bewertung

A calculation method that values derivatives as if all investors were risk-neutral and every asset earned the risk-free rate.

Because an option can be replicated with shares and a loan, it may be valued with artificial “risk-neutral” probabilities, discounting the expected payoff at the risk-free rate. These probabilities are calculation devices and say nothing about the real probability of a price rise.