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arXiv · 2407.01542

Benchmark-Neutral Pricing

Eckhard Platen
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Abstract

The paper introduces benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as numeraire and the new benchmark-neutral pricing measure for pricing. For a realistic parsimonious model, this pricing measure turns out to be an equivalent probability measure, which is not the case for the risk-neutral pricing measure. Many risk-neutral prices of long-term contracts are more expensive than necessary. Benchmark-neutral pricing identifies the minimal possible prices of contingent claims, which is illustrated with remarkable accuracy for a long-term zero-coupon bond.

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Eckhard Platen. 2024-04-09. Benchmark-Neutral Pricing. https://arxiv.org/abs/2407.01542

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