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Mathematics

Risk-Neutral Pricing and the Black-Scholes Equation

Quick fact

The Black-Scholes equation, derived using risk-neutral pricing, remains widely used despite its assumptions, and its creators won the Nobel Prize in Economics for this work in 1997.

Why this is interesting

Ever wondered why an option's price doesn't depend on how risky the stock is? Risk-neutral pricing reveals a surprising trick: the market prices options as if everyone is indifferent to risk.