Well, as I thought it might be, it was the semantics that was causing the confusion. Still, I think a word is in order on BR's use of the terminology.
BR warn against the use of 'expectations pricing' - a term that they use for pricing using the average of future possible payoffs (justification being the Strong Law of Large Numbers).
I was wrongly interpreting expectations pricing as an alternative term for risk neutral pricing. I may be mistaken but I don't think I have come across this term very frequently, either in texts or in papers - except, of course, in BR. A quick check in Google for the string 'expectation pricing' and 'derivatives' throws up 73 results. Also, if anything, Mark Joshi uses the term expectation pricing interchangably with risk neutral pricing. I didn't check all the links, but most of the other links are seemingly using the term expectations pricing similarly too.
That said, the warning at the outset (the term is first used in Chapter 1, page 2) to th ebeginners to guard against thinking about derivative pricing in the law of large numbers sense is appreciable. The use of the term expectations pricing, however, could have been avoided.
Posts
No comments:
Post a Comment