Question: a. When pricing an option using risk- neutral valuation, one is assuming that all investors are risk neutral. Hence, if one believes that investors are

a. When pricing an option using risk- neutral valuation, one is assuming that all investors are risk neutral. Hence, if one believes that investors are risk averse, risk- neutral valuation cannot be used. True or false? Explain your answer.
b. Explain Robert Merton’s “Trick” in the context of options pricing.

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a This is false Riskneutral valuation is a trick that works because the economy is arbitrage free It ... View full answer

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