All too often, the concept of risk-neutral probabilities in mathematical finance is poorly explained, and misleading statements are made. The aim of this paper is to provide an intuitive understanding of risk-neutral probabilities, and to explain in an easily accessible manner how they can be...

The publication of the Black-Scholes formula in 1973 appeared for the first time to put the pricing of financial options onto a rational and objective basis. While earlier option-pricing models relied on a subjective estimate of the stock’s uncertain future growth rate, the Black-Scholes model...