Question

What is the Risk-Neutral Valuation?

two period model, option valuation, utility maximization

Answer 1

Risk Neutral Valuation is defined as an investor's risk aversion and preferences which are irrelevant in valuing options because it uses the implied probabilities embedded within the underlying stock. I.e. risk aversion affects stock prices, but the valuation method of the option remains the same.

Two-Period Model is defined as the simplest framework for understanding intertemporal choice and dynamic issues

First Period: Current period

Second Period: Future period

It leaves out production and investment

Option values is defined as sum of intrinsic value pus time or "volatility" value

Option valuation is used to get the present value of the future payoff of an option

(when it is exercised)

Utility Maximizing Rule is used to maximize satisfaction the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal utility).