Question: The reason why the drift in a Monte Carlo simulation depends on the risk-free rate is explained because: We assume that we can build a

The reason why the drift in a Monte Carlo simulation depends on the risk-free rate is explained because:

  • We assume that we can build a hedge that eliminates the risk of the position.
  • In equilibrium, prices are the same regardless of risk preferences.
  • We are using the risk-neutral probability of the binomial model
  • Due to the impossibility of knowing the real rate of return.

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